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Financial Services And Markets Act 2023

Contents

Commentary on provisions of the Act

Part 1: Regulatory Framework

Chapter 1: Revocation of retained EU law

Section 1: Revocation of retained EU law relating to financial services and markets

  1. Subsection (1) revokes the retained EU law relating to financial services referred to in Schedule 1.
  2. This has the effect of revoking most types of retained EU law entirely, subject to commencement.
  3. Subsection (2) sets out the contents of Schedule 1.
  4. EUWA 2018 saves as part of UK law directly effective rights that existed through section 2(1) of ECA where those rights have been recognised by a domestic or EU court before then. It also saves rights derived from Directives that have been recognised by the courts prior to the end of the transition period. Subsection (3) disapplies those rights, along with any other powers, liabilities, obligations, restrictions, remedies and procedures which may have been preserved by EUWA 2018 in any of the instruments in Schedule 1. To the extent to which the government considers it desirable to save those rights, they can be saved through the savings provisions in section 84(2)(c).
  5. Subsection (4) clarifies that, where a piece of retained EU law is revoked, any amendments that that piece of retained EU law makes will continue to apply. For example, if an instrument referred to in Schedule 1 makes an amendment to FSMA 2000, then FSMA 2000 will remain unchanged, and unaltered by the revocation of the instrument which amended it.
  6. Subsection (5) enables HM Treasury to exclude subordinate legislation from Part 5 of the Schedule, meaning that it would not be revoked by Part 5.
  7. Subsection (6) is self-explanatory.

Section 2: Transitional amendments

  1. This section inserts Schedule 2, which makes transitional amendments to parts of Schedule 1 before it is revoked.
  2. Subsection (2) establishes the concept of a "transitional period". Each piece of legislation captured by Schedule 1 has its own transitional period, which lasts from the commencement of this section to the point at which the revocation of that instrument is commenced.
  3. Subsection (3) is self-explanatory.

Section 3: Power to make further transitional amendments

  1. This section creates a power for HM Treasury to modify retained EU law captured by Schedule 1 during the transitional period. It can only be modified for the reasons set out in subsection (2).
  2. Many of the ‘reasons’ in subsection (2) are similar to the objectives of the FCA, the PRA, the financial stability objective of the Bank of England, and the special resolution objectives in section 4 of the Banking Act 2009. This section should be read in its own right, and is in no way bound by the way that these objectives are interpreted by the regulators.
  3. Subsection (3) is self-explanatory.
  4. Subsection (4) enables HM Treasury to create powers, including new regulator rule-making powers, as part of modifying retained EU law for or in connection to one of the purposes in subsection (4). Subsection (4)(a) governs the creation of new powers generally; and subsections (4)(b) and (4)(c) confirm that HM Treasury may confer powers for HM Treasury to make subordinate legislation and for the regulators to make rules and other instrument. An important point is that subsection (4)(c) is not limited to rule-making. The Payments Systems Regulator (PSR), for example, makes directions and not rules, and a direction is an example of an "other instrument" that is captured by this section. Section 7 defines "regulator" as the PRA, the FCA, the Bank of England, or the PSR.
  5. Subsection (5) clarifies that when exercising the power under section 84(2)(c), HM Treasury can restate legislation for the purpose of making the law clearer or more accessible.
  6. Subsection (6) require HM Treasury to consult the PRA, the FCA, and PSR, and the Bank of England when exercising this power. The effect of subsection (7) is that HM Treasury must consult the PRA and the FCA in all instances, and the Bank of England and the PSR only where HM Treasury considers it appropriate to do so.
  7. Subsection (8)(b) provides that the power in this section cannot be used to amend technical standards, which are a subset of EU tertiary legislation. Responsibility for these instruments was transferred to the financial services regulators using powers in EUWA 2018, and the regulators already have the ability to amend or revoke them. Subsection (8)(b) also prohibits the use of the power over new technical standards instruments made by the regulators.
  8. Subsections (9) and (10) govern the Parliamentary procedure to be applied when the power in this section is exercised. Regulations under this section can be made through the negative procedure where they modify either EU tertiary legislation, or subordinate legislation which was originally made under negative procedure. Otherwise, the affirmative procedure must be used.

Section 4: Power to restate and modify saved legislation

  1. This section clarifies the power in subsection (5) of section 86, which is the power to make transitional and saving provision when making regulations to commence parts of this Act. Subsection (1) provides that, when revoking retained EU law captured by Schedule 1, HM Treasury may exercise the power to make saving provision in order to restate parts of retained EU law into domestic primary or secondary legislation (referred to as "restatement regulations"). Subsection (1)(a) enables HM Treasury to amend existing primary and secondary legislation and subsection (1)(b) enables HM Treasury to create new secondary legislation through restatement regulations.
  2. Subsection (2) enables HM Treasury to modify the restated retained EU law in the restatement regulations. HM Treasury can modify legislation either to make the law clearer or more accessible, or for any of the purposes in section 3(2). That means that when modifying retained EU law, either directly as per section 3 or when restating it into domestic legislation as per section 4, it can be modified for the same set of purposes.
  3. Subsection (3) provides that restatement regulations should not be treated as retained EU law, to the extent to which they would otherwise be.
  4. Subsection (4) provides that HM Treasury can continue to modify restatement regulations for the purpose of making the law clearer or more accessible or for any of the same set of purposes in section 3(2).
  5. Subsection (5) clarifies that HM Treasury can create powers for the regulators or HM Treasury, or modify existing powers in FSMA 2000, in the same way as through section 3(4).
  6. Subsection (6) clarifies that restatement regulations can be used to restate an entire piece of legislation t captured by Schedule 1, or part of one.
  7. Subsection (7) applies the same restriction to restating technical standards and other EU tertiary legislation as in section 3(8).
  8. Subsections (8) and (9) govern the Parliamentary procedure to be applied when this power is exercised. Regulations under this section can be made through the negative procedure where they amend either EU tertiary legislation, subordinate legislation which was originally made under negative procedure, or where legislation is restated without modification for a purpose in section 3(2). Otherwise, the affirmative procedure must be used. The affirmative procedure must be used in all instances where restatement regulations amend primary legislation.

Section 5: Power to replace references in EU directives

  1. Subsection (1) provides that HM Treasury can modify legislation in order to remove references to EU directives. While directives were implemented in UK law, there are many existing references to EU directives in legislation. Where HM Treasury exercises this power, there is no requirement that it replaces the removed reference with a new reference.
  2. Subsection (2) provides that this power is only exercisable if HM Treasury considers it necessary or desirable for the purpose of making the law clearer or more accessible, or for any of the purposes in section 3(2).
  3. Subsections (3) and (4) govern the Parliamentary procedure to be applied when this power is exercised. Where the power is exercised to amend primary legislation, the affirmative procedure must be used. Otherwise, the negative procedure can be used.

Section 6: Restatement in rules: exemption from consultation requirements

  1. Under section 6 the regulators are exempt from certain requirements when making, amending or revoking rules in relation to retained EU law.
  2. Subsection (1) provides that a relevant requirement does not apply to the making of rules by the regulator where the proposed rules make excluded provision in relation to the retained EU law specified in Schedule 1 and which has been specified by HM Treasury in regulations.
  3. "Relevant requirement" is defined in subsection (3) and means specified statutory requirements that apply to the regulators when make rules, such as carrying out a public consultation.
  4. "Excluded provision" is defined in subsection (2B) and means, in the opinion of the regulator, that the rules reproduce the relevant retained EU law in Schedule 1 without material changes, or the changes are material but their effect is to reduce a regulatory burden.
  5. Subsection (2) provides that a relevant requirement does not apply to rules made by the regulator if the rules make ‘excluded changes’ to existing rules that contain a retained EU obligation and which are specified by HM Treasury in regulations.
  6. "Excluded changes" is defined in subsection (2C) and means changes to existing rules that, in the opinion of the regulator, reduce a regulatory burden and have no other effects that are material.
  7. Subsection (3) provides that a relevant requirement does not apply to the revocation of rules by a regulator if the rules make provision containing a retained EU obligation and, the rules that are being revoked are not being replaced.
  8. Subsection (4) sets out a definition of "excluded provision" for the purposes of subsection (1).
  9. Subsection (5) sets out a definition of "excluded changes" for the purposes of subsection (2).
  10. Subsection (6) sets out a non-exhaustive list of matters that fall within the term "regulatory burden".
  11. Subsection (7) provides that a relevant requirement does not apply to an incidental, supplemental, consequential or transitional provision made in connection with rules that are made, amended or revoked as described in subsections (1), (2) or (2A).
  12. Subsection (8) sets out the meaning of ‘relevant requirement’ for the FCA, the PRA, the Bank of England, and the PSR.
  13. Subsection (9) requires the regulator to publish a statement when making, or revoking rules that are subject to this exemption. The statement must list the provisions of legislation that have been restated by the rules, the retained EU obligations that have been changed by the rules, or the retained EU obligations that have been removed by the rules, as relevant.
  14. Subsection (10), applies where new rules or changes to existing rules make material changes but their effect is to reduce a regulatory burden. In these circumstances, the subsection requires the regulators to explain in the statement why it believes that the proposed rules are compatible with, in particular, their statutory objectives.
  15. Subsections (5) and (6) are self-explanatory.
  16. Subsection (7) sets out the meaning of ‘rules’ referred to in this section in relation to the FCA, the PRA, the Bank of England and the PSR.

Section 7: Interpretation of Chapter

  1. This section governs the interpretation of Chapter 1 of the Act.
  2. Subsection (1) defines several terms which are used in the preceding sections and Schedule 1.
  3. Subsection (2) clarifies that, for the purposes of Chapter 1 of the Act, references to legislation do not include references to rules made by the regulators. Otherwise, regulator rules would be revoked through Part 5 of Schedule 1.
  4. Subsections (3) and (4) are self-explanatory.

Chapter 2: New regulatory powers

Designated activities regime

Section 8: Designated activities

  1. This section inserts new Part 5A into FSMA 2000.
New section 71K: Designated activities
  1. This new section of FSMA 2000 allows HM Treasury to specify an activity as a designated activity through secondary legislation.
  2. Subsections (1) and (2) empower HM Treasury to make designated activities regulations. These regulations enable HM Treasury to specify an activity as a "designated activity", bringing it into the regulation of new Part 5A of FSMA 2000.
  3. Subsection (3) stipulates that HM Treasury can only specify an activity is a designated activity if that activity is related or connected to either, the financial markets or exchanges of the United Kingdom, or to financial instruments, financial products or financial investments that are (or are proposed to be) issued or sold to, or by, persons in the United Kingdom.
  4. Subsection (4) is self-explanatory.
  5. Subsection (5) refers to Schedule 6B which is inserted into FSMA 2000 by section 8(9) of, and Schedule 3 to, this Act, which contains an illustrative, but non-exhaustive list of examples of the types of activity which HM Treasury intends to specify as designated activities. This is similar to Schedule 2 to FSMA 2000 which relates to regulated activities. Schedule 6B itself is inserted by subsection (9) of section 8.
  6. Subsection (6) clarifies that the contents of Schedule 6B in no way limits HM Treasury’s power to designate activities under this section.
  7. Subsection (7) clarifies that financial instruments, financial products and financial investments can include cryptoassets for the purpose of this section.
New section 71L: Restrictions on carrying out designated activities
  1. Subsection (1) prohibits any person from carrying on a designated activity, to the extent to which it is prohibited by HM Treasury through designated activities regulations.
  2. Subsection (2) stipulates that any person carrying out a designated activity, which is not prohibited under subsection (1), must do so in line with designated activities regulations made by HM Treasury, and designated activity rules made by the FCA.
  3. Subsection (3) is self-explanatory.
New section 71M: Designated activity regulations: general
  1. This section provide that designated activity regulations can make provision about the carrying on of delegated activities.
  2. Subsection (2) gives examples of what could be included in designated activity regulations. This includes the ability to state in which circumstances the restrictions on carrying out a designated activity imposed by section 71L are to apply to a person carrying out the activity outside the United Kingdom. Subsection 2(b) enables HM Treasury to make designated activity regulations supplementing or connected to any FCA rules in relation to designated activities.
  3. Subsection (3) allows HM Treasury to make exemptions through designated activity regulations, for example to exclude a certain type of firm from the requirement to follow designated activities rules and designated activities regulations. It also gives HM Treasury the ability to confer powers both on itself and on the FCA through designated activity regulations.
New section 71N: Designated activity: rules
  1. This section governs the making of designated activity rules by the FCA.
  2. Subsection (1) enables the FCA to make rules relating to any and all designated activities which are designated through designated activity regulations.
  3. Subsection (2) states that subsection (1) only applies to the extent to which this is provided for in HM Treasury’s designated activities regulations.
  4. Subsection (3) gives the FCA the ability to suspend designated activity rules for any length of time it considers appropriate.
  5. Subsection (4) allows the FCA to modify or waive designated activity rules where the FCA considers it appropriate.
  6. Subsection (5) states that the FCA can only suspend, modify or waive designated activity rules under subsections 3 or 4 under circumstances specified by HM Treasury in secondary legislation.
  7. Subsection (6) requires the FCA to consult with the PRA before suspending any rules.
  8. Subsection (7) states that the FCA must bring any suspension of designated activity rules under subsection (3) to the attention of those impacted by the relevant rules.
  9. Subsection (8) states that the reference to "authorised persons" in section 138T(a) of FSMA 2000 should also be read as relating to persons subject to designated activities rules. This has the effect of meaning that the FCA’s designated activities rules can make different provision for different types of persons, activities, or investment. Section 138T(b) and Section 138(c) apply automatically to designated activities rules, as they apply to all regulator rule-making under FSMA 2000, including designated activities rules.
New section 71O: Designated activities: directions
  1. Subsection (1) gives the FCA a power of direction in relation to designated activities. As supplemented by subsection (3), this power enables the FCA to require a person carrying on a designated activity to take, or refrain from taking, an action specified by the FCA.
  2. Subsection (2) states that HM Treasury has the power to state, in secondary legislation, when the FCA is able to exercise its power of direction under subsection (1). Subsection (10) expands on this by enabling HM Treasury to set conditions which the FCA must meet when exercising a power of direction. Under subsection (11) this can include, but is not limited to, a requirement to consult the PRA before imposing or varying a requirement under subsection (1) relating to a PRA-authorised person.
  3. Subsection (4) states that any action required by the FCA’s power of direction under this section need not be in relation to a designated activity itself.
  4. Subsections (5) to (12) are self-explanatory.
New section 71P: Designated activities: liability
  1. This section sets out that designated activities regulations can make regulations concerning liability and compensation.
  2. Subsection (2) states that a contravention of a designated activity rule or regulation does not make a person guilty of an offence, or make transactions void or unenforceable, or give rise to action for breach of statutory duty, unless designated activity regulations explicitly state otherwise.
  3. Subsection (3) gives examples of how HM Treasury may use its power under subsection (1).
  4. Subsection (3)(d) clarifies that HM Treasury may make such regulations for the purpose of subsection (1) by applying, and if needed modifying, existing provisions of FSMA 2000.
New section 71Q: Designated activities: enforcement
  1. This section enables designated activities regulations to make regulations concerning enforcement of designated activities regulations and rules. This will allow HM Treasury to create an enforcement framework for each designated activity.
  2. Subsection (2) gives a non-exhaustive list of examples of the types of enforcement provision which can be made through designated activities regulations, such as monetary penalties or powers of censure.
  3. Subsection (3) states HM Treasury may create such enforcement frameworks for designated activities by applying existing provisions of FSMA 2000, with or without amendments. For example, instead of creating a new investigation power for the FCA, designated activities regulations could apply the relevant parts of FSMA 2000 which govern the FCA’s current information gathering powers.
  4. This subsection also enables designated activities regulations to apply, with or without amendments provisions in FSMA 2000 which create criminal offences.
  5. Subsection (4) clarifies that HM Treasury’s power to apply provisions in FSMA 2000 under this section includes the power to amend, or repeal such provisions.
New section 71R: Designated activities and rules: connected amendments
  1. This section creates a new power, for the purpose of modifying primary legislation in order to make modifications which are appropriate, taking account of designated activities regulations and rules.
  2. Subsection (1) gives HM Treasury the power to amend primary legislation including FSMA 2000, if it considers appropriate to do so for the purposes of, or in connection with, designated activity regulations or rules.
  3. Subsection (2) clarifies that HM Treasury’s power under subsection (1) to amend primary legislation in particular extends to revoking or varying any requirement under FSMA 2000 which extends to a designated activity.
  4. Subsection (3) further clarifies that HM Treasury’s power to amend FSMA 2000 under subsection (1) allows HM Treasury to modify any criminal offence in FSMA 2000 which relates to a designated activity. Modification in this case includes widening the scope of the criminal offence.
  5. Subsection (4) is self-explanatory.
Section 71S: Designated activity regulations: Parliamentary control
  1. Subsections (1) and (2) provide that regulations made under new section 71K are subject to the affirmative procedure where they provide for an activity of a specified description to be a designated activity.
  2. Subsections (3) to (7) provide that where, in the opinion of HM Treasury, it is, by reason of urgency, necessary to make the regulations without a draft being laid before and approved by parliament, the regulations must be laid after being made and cease to have effect at the end of the period of 28 days beginning with the day on which the regulations are made unless approved by parliament.
Section 8: Designated activities: continued
  1. Subsection (3) onwards makes a number of changes to FSMA 2000, which are needed as a result of inserting Part 5A.
  2. Subsection (4) amends section 3E of FSMA 2000. Section 3E of FSMA 2000 provides for a memorandum of understanding between the PRA and the FCA regarding their functions under FSMA 2000. Subsection (4) amends section 3E to include directions made by the FCA under section 71O within the ambit of the memorandum of understanding.
  3. Subsection (5) amends section 3I of FSMA 2000. Where the FCA proposes to make rules in relation to persons who are also regulated by the PRA, section 3I of FSMA 2000 gives the PRA power to direct the FCA not to make those rules in specified circumstances. Subsection 5 includes rules proposed to be made by the FCA under Part 5A of FSMA 2000 within the PRA’s powers under section 3I.
  4. Subsection (6) excludes designated activity rules from section 138D of FSMA 2000 (action for damages).
  5. Subsection (7) amends section 417 to insert a definition of ‘designated activity’ into FSMA 2000.
  6. Alongside the new section 71S, subsection (8) establishes the Parliamentary procedure which governs statutory instruments made under new Part 5A of FSMA 2000. The affirmative procedure is used where HM Treasury ‘designates’ a new activity (subject to the urgency exception described above), and where HM Treasury amends primary legislation.
  7. Subsection (9) inserts new Schedule 6B, which is Schedule 3 to this Act, into FSMA 2000.

Financial market infrastructure: general rules and requirements

Section 9: Rules relating to central counterparties and central securities depositories

  1. This section inserts new sections 300F and 300G into FSMA 2000, which will create a general rule-making power for the Bank over recognised central counterparties, recognised CSDs, third country central counterparties and third country CSDs. The terms "recognised central counterparty", "recognised CSD", "third country central counterparty" and "third country CSD" have the meaning provided for in section 285 of FSMA 2000. This section will enable the Bank to set rules for these firms that it judges are necessary or expedient to advance its Financial Stability Objective.
  2. New section 300G places restrictions on how this general rule-making power will apply to third country CCPs and CSDs. It ensures that the Bank can only apply "corresponding" rules to these firms. This means that the Bank can only apply rules which have already been applied to the relevant domestic firm (for example, in the case of third country CCPs, this would be recognised CCPs). The Bank would be able to apply all corresponding rules to the third country CCP or CSD or only such rules as it considers appropriate.
  3. Subsection (3) of new section 300G allows the Bank to modify the rules to ensure that they can be applied effectively to overseas firms, reflecting their different circumstances. This is intended to account for the fact that domestic rules may have been drafted with the specific legal or operational circumstances of UK CCPs in mind. For example, rules may make reference to UK-law concepts or definitions, or they may be tailored to fit the corporate structure of UK firms. As such, the Bank may need to modify the rules to ensure they operate effectively for overseas firms.
  4. New section 300G also makes different provision for "systemic third country CCPs" compared to other CCPs and CSDs. "Systemic third country CCPs" are third country CCPs the Bank has determined are systemically important, or are likely to become systemically important, to the financial stability of the United Kingdom. When making this determination, the Bank must have regard to criteria of general application set out by HM Treasury through secondary legislation. It must also have regard to any statement of policy issued by the Bank which provide further specification of the criteria set out by HM Treasury.
  5. Where a third country CCP is a systemic third country CCP, the Bank will automatically be able to apply rules to that firm which correspond to those for recognised CCPs. For other CCPs and CSDs, the Bank may only apply its rules to third country firms if HM Treasury makes regulations authorising it to do so (new section 300G (1)(b)). When making these regulations, HM Treasury, under subsections (4) and (5) of the new 300G, would be able to limit which firms any such Bank power would apply to, and to impose further conditions or limitations on how any power could be used. These restrictions do not apply to the Bank’s power to apply corresponding rules to systemic third country CCPs.
  6. New section 300G(14) allows HM Treasury to make regulations applying other provisions of FSMA 2000 with modifications to third country CCPs and third country CSDs. These are the overseas firms that the Bank will be able to apply its rules to, subject to the limitations set out in s.300G. This power is needed in order to ensure that provisions of FSMA 2000 - for example, regarding enforcement - apply to these firms, as is appropriate in light of the rules that the Bank is able to make. Schedule 17A already makes some provision for application of provisions in FSMA 2000.
  7. Subsection (5) of section 9 amends the Bank’s power at section 293 of FSMA 2000 to make rules requiring recognised bodies to notify it of specified events, or provide it with specified information. This amendment will enable the Bank to make rules under section 293 concerning third country central counterparties.

Section 10: Central counterparties and central securities depositories: other requirements

  1. This section inserts a new paragraph 9B into Schedule 17A to FSMA 2000. This new paragraph provides for a power for the Bank to be able to impose requirements on a recognised central counterparty, recognised CSD and systemic third-country CCP; these are described as "relevant bodies" in this section. There are two key means by which a requirement can be imposed. First, paragraph 9B(1) to (5) provide that the Bank can impose a requirement of its own initiative, either if it is desirable to do so for its objective ‘to protect and enhance the stability of the financial system of the United Kingdom’ (the Financial Stability Objective), or if the relevant body has failed, or is likely to fail, to satisfy recognition requirements or an obligation under FSMA 2000. This power is based on the FCA’s "own-initiative power" in section 55L(3) of FSMA 2000, and the PRA’s equivalent power in section 55M. Second, paragraph 9B(7) provides that the Bank can impose a requirement on the application of the relevant body itself. This is based on the FCA’s power to impose a voluntary requirement on authorised persons in section 55L(5) of FSMA 2000 and the PRA’s equivalent power in section 55M.
  2. Paragraph 9B(6) provides that the Bank’s "own-initiative" power cannot be used to restrict or prohibit discretionary payments to employees or shareholders of a recognised central counterparty. Paragraph 13 of Schedule 11 to this Act gives the power to impose such a restriction or prohibition in certain circumstances.
  3. Paragraph 9B(9) provides that relevant provisions of Part 4A apply to requirements imposed by the Bank under this new provision, as they apply to requirements imposed by the FCA under section 55L, with appropriate modifications provided for in sub-paragraph (10). 

Section 11: Rules relating to investment exchanges and other data reporting service providers

  1. This section inserts new section 300H into FSMA 2000. This new section gives the Financial Conduct Authority (FCA) general rule-making powers with regard to Recognised Investment Exchanges (RIEs) and Data Reporting Service Providers (DRSPs).
  2. Subsection (1) explains that FSMA 2000 will be amended to establish this power.
  3. Subsection (2) inserts a new section (300H) into FSMA 2000 to confer the new rule-making powers on the FCA.
  4. New subsection 300H(1) of FSMA 2000 limit the FCA’s ability to make rules applying to RIEs and DRSPs to circumstances where the FCA considers that doing so is necessary or expedient to advance one or more of its operational objectives. These objectives are set out in FSMA 2000 (see section 1B(3)).
  5. New subsection 300H(2) defines relevant activity for the purposes of 300G.
  6. New subsection 300H(3) provides indicative examples of the sort of requirements the FCA could impose using this power.
  7. New subsection 300H(4) stipulates that the FCA may not use this power to change, amend or revoke any retained direct EU law for RIEs or DRSPs with the exception of parts of retained direct EU law which take the form of FCA rules.
  8. New subsection 300H(5) sets out the definitions applicable to this power. It also sets out that this power is only applicable to UK authorised RIEs, not overseas investment exchanges as defined in section 313(1) FSMA 2000.
  9. Subsection (3) gives the FCA the power to appoint a skilled person to collect and update information in relation to RIEs, if it considers that an RIE has contravened a requirement in rules made by the FCA.
  10. Subsection (4) enables the FCA to appoint investigators if they believe an authorised RIE might have breached the rules made using this power.
  11. Subsection (5) gives the appropriate regulator the power to publish a statement when it considers that a DRSP or RIE has contravened a relevant requirement.
  12. Subsection (6) makes consequential amendments to Chapter 3A of Part 18 of FSMA 2000. This ensures that the various disciplinary measures in that chapter also apply to DRSPs in respect of breaches of rules made under the FCA’s general rule-making power.

Section 12: Treasury directions to Bank of England: restrictions

  1. Section 4 of the Bank of England Act 1946 contains provisions for HM Treasury to be able to give directions to the Bank where it considers it necessary in the public interest to do so. Section 12 of this Act amends section 4 of the Bank of England Act 1946, so that it no longer applies to the Bank’s functions in relation to recognised central counterparties, recognised CSDs, third country central counterparties or third country CSDs. Instead, the Bank will be subject to the transparency and accountability requirements set out elsewhere in these Notes.

Financial market infrastructure: piloting powers

Section 13: Testing of FMI technologies or practices

  1. This section provides for the temporary disapplication and modification of legislation to allow FMI to innovate with certain technology and new practices in the activities they perform in a controlled environment. This will ensure that any modification or disapplication of legislation is fit for purpose before any permanent changes are enacted in general law.
  2. Subsection (1) provides HM Treasury with a power to make provision in regulations to allow for the creation of one or more iterations of an FMI sandbox. This is intended to test, for a limited period, the efficiency or effectiveness of engaging in FMI activity in a particular way, as permitted by the regulations in accordance with Subsection (2) to (11). It also provides an opportunity to assess if any relevant enactments may need amending permanently in general law and, if so, in what form.
  3. Subsection (2) provides that carrying on FMI activity in a particular way is intended to include the use of developing technology or the adoption of new and different practices. For example, in a particular part of the trading, clearing, and settlement cycle.
  4. Subsection (3) provides that regulations allowing for the FMI activities permitted within this section will be referred to as an FMI sandbox.
  5. Subsection (4)(a) and (b) provide that the creation of an FMI sandbox will consist of a regulatory framework that will specify or otherwise make provision for the type of FMI activities, FMI entities and "other persons" that can participate in a particular iteration of the FMI sandbox. "Other persons" shall include, for example, persons either connected with or otherwise peripherally engaged with an FMI entity’s FMI activities in a particular iteration of an FMI sandbox arrangement. One such example being "users" of an FMI entity’s services within an FMI sandbox. This is because if changes are made to requirements for FMI entities, it may also be desirable or necessary to make changes to requirements for their related users.
  6. Subsection (4)(c) provides expressly that an FMI sandbox is not intended to operate indefinitely. An FMI sandbox can be determined by reference to a particular date, time frame or some other trigger in connection with its cessation.
  7. Section 84 contains a general power that allows for a regulation to impose different requirements on different persons. This would be helpful in the above respect, particularly as it relates to different types of participants operating within or engaging with an FMI sandbox.
  8. Subsection (5) makes provision for regulations to confer functional powers on the regulators in connection with the creation and operation of an FMI sandbox. For example, the provision could confer on the regulators a functional, rule-making power in connection with winding-down an FMI sandbox. This would include provision for regulations conferring discretionary powers on regulators under section 16(1). It would not extend to conferring functional powers on regulators that are legislative in nature because these operational powers would fall to HM Treasury. In this respect, HM Treasury could exercise a general power to make regulations under section 84 of the Act to ensure a smooth transition between the temporarily modified legislation in an FMI sandbox and those provisions that are adopted in general law.
  9. Subsection (6)(a) and (b) allow for a framework of legislation to be temporarily disapplied or modified, from the list of relevant enactments, for the purpose of testing the compatibility of FMI activities against this within an FMI sandbox. Subsection (6)(b) allows for new provisions to be added to support new practices or technologies that are not covered by existing legislation. For example: in the context of DLT, new provisions may be required for so-called smart contracts, which automate the execution of certain activities when certain pre-conditions are met. New provisions may be required to address new risks, such as around cyber security. Subsection (6)(c) allows for the application of legislation that would otherwise not apply to a particular FMI entity and other persons (such as "users"), were it not permitted to engage in a particular activity within an FMI sandbox. For example, an FMI sandbox could allow a trading venue to perform securities issuance, settlement and maintenance (in addition to trading). Under current legislation, these activities are performed only by a CSD and not a trading venue. This section would also enable further relevant enactments to be temporarily disapplied, modified or applied during an FMI sandbox so that any new and unforeseen legislative obstacles or risks identified during an FMI sandbox could be assessed in a timely manner. This subsection also makes clear that any disapplication, modification or alternative application of legislation within an FMI sandbox is non-textual and not intended to amend, repeal or revoke legislation, subject to it being implemented permanently by HM Treasury under section 15.
  10. Subsection (7) makes provision in regulation that would allow a regulator to exercise powers under Subsection (6) if a relevant enactment contains rules or standards instruments made by regulators. For example, the regulator may want certain formalities connected with its rule making powers, such as a duty to consult in a relevant enactment such as FSMA 2000 to not apply when making or modifying rules or technical standards for purposes of an FMI sandbox. This section is intended to supplement and not undermine either powers that may be conferred on regulators in subsections (5) or (6) when read together with section 16(1) or otherwise the operation of their powers in general law.
  11. Subsection (8) refers to Schedule 1 which serves as an indication of how an FMI sandbox might be structured and operate.
  12. Subsection (9) makes provision for more than one iteration of an FMI sandbox to operate at any one time which may be different, similar or the same to an existing or previous FMI sandbox either in terms of function or effect.
  13. Subsection (10) provides that regulations made under this section are subject to the negative statutory instrument procedure.
  14. Subsection (11)(a) defines FMI entities that are eligible to apply and participate in an FMI sandbox and makes provision to amend the list of FMI entities to beyond what is listed. Subsections (11)(b) and (11)(c) are self-explanatory.

Section 14: Reports on FMI sandboxes

  1. Subsections (1) to (7) of this section specify the reporting obligations on HM Treasury when it exercises its regulatory powers under section 13. This includes an obligation to prepare and publish a report on an iteration of an FMI sandbox to be laid before Parliament. The subsection specifies the information the report must contain by the agreed deadline. Subsection (5), imposes an express obligation on HM Treasury to engage with the relevant regulator when preparing a report and imposes an obligation on the regulator to provide HM Treasury with information it may require in preparing its report.

Section 15: Permanent implementation of arrangements tested under an FMI sandbox

  1. Subsections (1) to (6) of this section make provision for HM Treasury to exercise its regulatory powers and roll out into general law those legislative provisions which have been subject to temporary modification and disapplication within an FMI sandbox and Parliamentary scrutiny. These legislative provisions would therefore apply to entities that either did not participate or were ineligible to participate in an FMI Sandbox, such as overseas operators of FMI entities, subject to the entities being authorised by the appropriate regulator.
  2. Subsections (1) and (2) provides that the exercise of this power will be subject to the due consideration of the "efficiency or effectiveness" of an FMI sandbox arrangement, as provided for in the reporting procedure in section 14 and can take place either at the conclusion of an FMI sandbox or while it remains operational. The intention is that this power is broad enough to include provisions in relevant enactments that may not have been included in the initial legislative framework of an FMI sandbox but are nonetheless included in making permanent changes in general law to ensure the legislation operates as intended. For example, where it may not be possible or practicable to test a particular activity in the FMI sandbox, but where changes to general law may be required to facilitate the FMI activities.
  3. Subsection (3) makes express provision for a determination to be made as to the efficiency or effectiveness of an FMI before the expiry of an FMI sandbox. If an FMI sandbox is terminated early, it would be possible to revoke the temporary modifications before the termination date and, subject to Parliamentary scrutiny, approve the amendments into general law. This is intended to provide legislative continuity and avoid legislative gaps between the termination and the permanent implementation of FMI sandbox arrangements and would operate in conjunction with HM Treasury’s power to engage general transitional provisions within the Act.
  4. HM Treasury’s powers under subsections (4), (5) and (6) make provision to amend repeal or revoke a relevant enactment, subject to the affirmative statutory instrument procedure if it concerns primary legislation or retained direct principal EU legislation. Otherwise, the negative statutory instrument procedure will apply.

Section 16: Regulations

  1. Subsection (1) allows HM Treasury to confer a discretionary power on an appropriate regulator or another specified person to do anything under or for the purposes of the regulations made under sections 13 to 15. This includes a power for an appropriate regulator to make, disapply or modify rules or technical standards in connection with an FMI sandbox. For example, where HM Treasury has made changes to remove obstacles from primary legislation, it may be necessary for the regulators to also make consequential changes to the related technical standards and rules. Prior to conferring such a power, HM Treasury must consult with the appropriate regulators or such other persons it considers appropriate.

Section 17: Interpretation

  1. Subsection (2) defines "appropriate regulator" as either the FCA or the Bank of England acting either independently or jointly in the operation and oversight of an FMI sandbox.
  2. Subsection (3) defines a relevant enactment for the purpose of the provisions and sections 16(6) and (7) provides HM Treasury with a power to amend the list of relevant enactment by way of the affirmative statutory instrument procedure.
  3. Subsection (4) provides the meanings for "FMI activities", "FMI participant", "FMI sandbox" and "FMI sandbox arrangements".
  4. Subsection (5) provides that "FMI entities" defined for the purpose of section 13(11) have the same meaning as in Part 18 of FSMA 2000.

Powers in relation to critical third parties

Section 18: Critical third parties: designation and powers

  1. This section inserts new sections 312L to 312W into FSMA 2000. These new sections enable the FCA, the PRA and the Bank of England to oversee the services provided by critical third parties to the UK’s financial services sector.
  2. New section 312L grants HM Treasury the power to designate a third party to an authorised person, relevant service provider or FMI entity ("regulated firms") as a critical third party (CTP) (subsection (1)). HM Treasury can only designate an entity as a CTP if failure or disruption to the CTP’s services would pose a financial stability or confidence risk to the UK (subsection (2)).
  3. Subsection (3) sets out criteria which HM Treasury must have regard to in designating a CTP. These are the materiality of the services provided to regulated firms in the context of the UK’s financial stability; and the number of regulated firms to which services are provided by a given entity.
  4. Subsection (4) obliges HM Treasury, before designating a CTP, to consult the relevant regulators (and anyone else HM Treasury considers appropriate); to give the proposed CTP a notice in writing which sets out a period in which that potential CTP can make representations to HM Treasury; and to have regard to any representations received from that entity.
  5. Subsection (5) prevents the Bank of England from being designated as a CTP.
  6. Subsection (6) sets out that the relevant regulators for the CTP regime are the FCA, the PRA and the Bank of England, while subsections (7) and (8) provide definitions.
  7. New section 312M grants the FCA, the PRA and the Bank of England a power to make rules over the services that CTPs provide to regulated firms to advance the relevant regulator’s objectives.
  8. Subsection (2) clarifies the regulators’ objectives for this purpose.
  9. Subsection (3) applies and adapts the existing FSMA 2000 provisions containing the regulators’ rule-making powers over authorised persons for the CTP regime.
  10. New section 312N grants the FCA, the PRA and the Bank of England a power to direct a CTP to do (or not do) something for the purpose of advancing a regulator’s objectives. This could include setting conditions or restrictions on the CTP’s provision of services.
  11. Subsection (2) sets out procedural requirements for a direction.
  12. Subsections (3) to (6) provide that a CTP (including its officers and staff) be immune from damages where it is acting in accordance with a Direction from the Bank, the PRA or the FCA which has been given for the purpose of resolving or reducing a threat to the stability of the UK financial system (unless the CTP is acting in bad faith or contrary to section 6(1) of the Human Rights Act 1998). In such a case, the direction must set out that immunity applies.
  13. Subsections (7) to (9) are self-explanatory.
  14. New section 312O sets out further procedural matters for a direction under 312N.
  15. Subsection (1) provides that the relevant regulator must give written notice to a critical third party.
  16. Subsection (2) enables the relevant regulator to specify when the direction takes effect (which could be immediately or on a specific date). Alternatively, if the regulator specifies no date in the notice, then the notice takes effect when the matter to which the notice relates is no longer open to review.
  17. Subsection (3) requires no further explanation.
  18. Subsection (4) sets out the matters a notice must contain.
  19. Subsection (5) enables the relevant regulator to extend the period of notice it provides for a critical third party to make representations.
  20. Subsection (6) provides that the relevant regulator must give written notice to the critical third party if, after considering its representations, it still wishes to proceed with a direction (or wishes to continue the effect of a notice which has already been given).
  21. Subsection (7) provides that the relevant regulator must give written notice if, after considering a critical third party’s representations, it decides not to proceed with the proposed direction; decides to give a different direction; or to revoke a direction which is already in force.
  22. Subsection (8) ensures that the critical third party is notified of its right to refer the matter to the Tribunal.
  23. Subsection (9) ensures that if the relevant regulator, after taking representations, gives a different direction, the new notice must comply with the same rules (in subsection (4)) as the original notice.
  24. Subsection (10) applies existing rules as to whether a matter can be referred to the Tribunal.
  25. New section 312P grants the FCA, the PRA and the Bank of England powers to require information from a CTP, to commission a report by a skilled person and to investigate potential contraventions.
  26. Subsection (1) applies the existing FSMA 2000 information-gathering and investigation provisions to CTPs.
  27. Subsection (2) adapts the language in those provisions to the CTP regime.
  28. Subsection (3) enables the regulators to delegate the power to request information to their members of staff.
  29. Subsection (4) makes clear that information can only be requested if it is reasonably required in relation to the regulators’ functions under the CTP regime.
  30. Subsection (5) enables the regulators to obtain a skilled person’s report in respect of a CTP or a person connected to a CTP (that is, a member of the CTP’s group, a controller of the CTP, or an officer or employee of these).
  31. Subsection (6) enables the regulators to obtain a skilled person’s report in respect of a CTP in cases where a regulator suspects a breach of their rules to have occurred.
  32. Subsection (7) restricts the regulators’ power of investigation to those cases where it appears that a CTP may have contravened a requirement.
  33. Subsections (8) and (9) enable the regulators to require, where necessary or expedient for an investigation, persons with relevant information to appear for an interview and provide information.
  34. Subsection (10) provides definitions.
  35. New section 312Q expressly empowers the FCA, the PRA and the Bank of England to publicly censure a CTP which has contravened a requirement under the CTP regime.
  36. New section 312R sets out disciplinary measures available to the regulators under the CTP regime.
  37. Subsection (1) provides that the disciplinary measures in the section are available if the FCA, the PRA or the Bank of England consider that a CTP has contravened a requirement imposed under the CTP regime.
  38. Disciplinary measures are given effect by the publication of a notice (subsection (2)), which can prohibit the CTP and specified regulated firms from entering into arrangements for the services specified in the notice or, if such arrangements already exist, prohibit the CTP from continuing to provide (and specified regulated firms from continuing to receive from the CTP) the specified services.
  39. Subsection (3) ensures that disciplinary measures can be tailored to the contravention and are appropriately proportionate.
  40. The regulators may only exercise the disciplinary powers if they are satisfied that it is appropriate in the circumstances to take action against the CTP; that the action will not threaten the UK’s financial stability or confidence in the UK finance system; and that it is desirable to exercise the power in order to advance one or more of the regulators’ objectives (subsection (4)).
  41. Subsection (5) sets out that notices can be varied or withdrawn, including on application by the CTP concerned.
  42. Subsection (6) requires no further explanation.
  43. Where a notice contains a measure from subsection (2), the regulators must publish the notice in a way that best brings it to the attention of those affected by it (subsection (7)).
  44. Subsection (8) brings a breach of these disciplinary measures into the existing offences framework of FSMA 2000.
  45. Subsection (9) requires no further explanation.
  46. New section 312S sets the notice and other procedural requirements for a statement under section 312Q or a notice under section 312R and grants the CTP the right to appeal to the Tribunal.
  47. New section 312T obliges the FCA, the PRA and the Bank of England to publish a statement of policy setting out how they will use the disciplinary powers in the CTP regime (subsection (1)). Subsections (2) to (4) are self-explanatory.
  48. New section 312U obliges the FCA, the PRA and the Bank of England to coordinate their functions under the CTP regime (subsection (1)), to the extent that doing so does not create a disproportionate burden (subsection (3)).
  49. It obliges them to seek information from each other as needed (subsection (2)) and to consult each other before exercising any of the powers in the CTP regime (subsection (4)).
  50. New section 312V requires the FCA, the PRA and the Bank of England to produce and keep up-to-date a memorandum of understanding (MoU) relating to the exercise of functions in the CTP regime and how they will comply with their duty to coordinate in new section 312Q (subsection (1)).
  51. Subsections (2) to (6) require no further explanation.
  52. The regulators do not need to include in the MoU any aspect of their coordination under new section 312Q which would be against the public interest to publish, or which is technical or operational and so does not affect the public (subsection (7)).
  53. New section 312W disapplies certain sections of FSMA 2000 (which have already been re-cast above) for the purposes of the CTP regime.

Section 19: Critical third parties: related amendments

  1. This section amends FSMA 2000 to accommodate the new framework for CTPs as inserted by section 18.
  2. Subsection (2) inserts a definition of a critical third party into FSMA 2000 for the purpose of the amendments the Act makes to Schedule 17A.
  3. Subsection (3) ensures that existing provisions in FSMA 2000 about injunctions function properly for the CTP regime.
  4. Subsection (4) applies existing publication requirements in FSMA 2000 to warning notices issued under new sections 312Q and 312R.
  5. Subsection (5) applies existing provision in FSMA 2000 about warning notices and decision notices to the power of censure and the disciplinary powers in the CTP regime.
  6. Subsection (6) establishes the Parliamentary procedure for an order of HM Treasury designating a service provider as a CTP.
  7. Subsection (7) is self-explanatory.
  8. Subsections (8) and (9) apply the legislative framework around rules made by the FCA and the PRA to rules made by the Bank of England under the new section 312M.
  9. Subsection (10) applies the restrictions on disclosure of confidential information to information received by the Bank of England in connection with the exercise of its functions under the CTP regime.
  10. Subsection (11) clarifies that the Bank of England may also apply to the court for an injunction in connection with a contravention or likely contravention of a requirement under the CTP regime.
  11. Subsection (12) applies existing provisions in FSMA 2000 on restitution orders to the CTP regime.
  12. Subsection (13) applies existing provisions in relation to notices under FSMA 2000 to the power of censure and disciplinary measures in the CTP regime.
  13. Subsection (14) makes it an offence (as it already is with the PRA and the FCA) to knowingly or recklessly give the Bank of England information which is false or misleading in connection with a requirement imposed by the Bank of England in relation to CTPs.
  14. Subsection (15) applies existing record-keeping provisions in FSMA 2000 to the CTP regime.
  15. Subsection (16) applies existing provisions in FSMA 2000 about the Bank of England’s annual report to the CTP regime.
  16. Subsection (17) incorporates the changes in Part 5 of Schedule 2 into this provision.

Regulatory gateway for financial promotions

Section 20: Financial promotion

  1. This section amends FSMA 2000 to establish the regulatory gateway, which authorised firms must pass through before being able to approve the financial promotions of unauthorised firms. Any authorised firm wishing to approve the financial promotions of unauthorised firms will first need to obtain permission to do so from the FCA or otherwise do so within the scope of an exemption to the regulatory gateway.
  2. Subsection (1) is self-explanatory.
  3. Subsection (2) relates to the insertion of the new subsection 2A into section 21 of FSMA 2000. This removes a general permission that allows authorised firms to approve the content of financial promotions. By this new subsection, an authorised firm can only approve a financial promotion if it is either permitted to do so having gone through the regulatory gateway under the new section 55NA of FSMA 2000, or an applicable exemption applies under the new section 55NB of FSMA 2000.
  4. Subsection (3) sets out the substance of the new financial promotion regulatory gateway and inserts the new section 55NA and the new section 55NB into FSMA 2000.
  5. Subsection (3) (inserting section 55NA(1) of FSMA 2000) imposes a new requirement on all authorised firms to have permission from the FCA under the regulatory gateway before approving financial promotions, unless exempt from this requirement.
  6. Subsection (3) (inserting section 55NA(2) of FSMA 2000) provides that authorised firms that approve financial promotions for the purpose of section 21 of FSMA 2000, without FCA permission under the regulatory gateway, will be doing so in breach of a requirement imposed by the FCA under FSMA 2000.
  7. Subsection (3) (inserting section 55NA(3) of FSMA 2000) provides that both an authorised firm, or an applicant for authorisation, may apply for and be granted permission under the regulatory gateway.
  8. Subsection (3) (inserting section 55NA(4) to (6) of FSMA 2000) details the FCA’s powers to grant, vary or cancel a permission to approve financial promotions under the regulatory gateway. The FCA is able to grant the firm permission in line with the terms sought in its application, but it can also make the permission subject to other, potentially narrower, terms if it considers that appropriate. The FCA is also able to vary or cancel an existing permission, either on its own initiative or following an application made by the firm that was granted the permission. Where a permission is either granted or varied, the FCA must set out the terms on which it has been granted or varied.
  9. Subsection (3) (inserting section 55NA(7) of FSMA 2000) provides that the FCA may refuse an application for a new regulatory gateway permission, or a variation or cancellation of an existing permission, if the FCA believes that such a decision would advance one or more of its operational objectives of consumer protection, integrity and competition under section 1B(3) of FSMA 2000.
  10. Subsection (3) (inserting section 55NA(8) of FSMA 2000) details the grounds on which the FCA may vary or cancel an authorised firm’s existing permission, on its own initiative. These arise if it appears to the FCA that the firm has not approved or refused to approve any promotions of unauthorised firms in at least 12 months, or if doing so would advance one or more of its operational objectives.
  11. Subsection (3) (inserting section 55NA(9)(a) of FSMA 2000) imposes a requirement on the FCA to consult the PRA before granting, varying or cancelling a permission under the gateway given to a firm that is, or will be, a PRA-authorised firm or to a firm that is part of a group that includes a PRA-authorised firm.
  12. Subsection (3) (inserting section 55NA(9)(b) to (10) of FSMA 2000) requires the FCA to consult the Gibraltar regulator before granting, varying or cancelling a permission given to a Gibraltar-based firm. The exception is if the FCA varies or cancels a gateway permission on its own initiative, in which case the FCA must only inform the Gibraltar regulator of its decision.
  13. Subsection (3) (inserting section 55NA(11) of FSMA 2000) provides that the requirement for authorised firms to obtain FCA permission under the regulatory gateway will not apply if an exemption under the new section 55NB applies.
  14. Subsection (3) (inserting section 55NA(12) of FSMA 2000) provides that, where appropriate, the FCA is able to draw on other powers in FSMA 2000 to impose further requirements on an authorised firm’s ability to approve a financial promotion, beyond what is provided for in the new section 55NA(1) of FSMA 2000. It also clarifies that, where any additional requirement is inconsistent with the new section 55NA(1) of FSMA 2000, then that requirement would be of no effect to the extent of the inconsistency.
  15. Subsection (3) (inserting section 55NB(1) to (3) of FSMA 2000) confers a power on HM Treasury to create exemptions to the regulatory gateway in respect of certain firms, activities, circumstances and under certain conditions.
  16. Subsection (4) is self-explanatory.
  17. Subsection (5) confirms that the amendments under this section and Schedule 5 apply to firms authorised either before or after they come into force and that it does not affect financial promotions that were approved before this measure comes into force.

Sustainability disclosure requirements

Section 21: Sustainability disclosure requirements

  1. The Act inserts two sections about sustainability disclosure requirements, 416A and 416B, into FSMA 2000. The Act enables HM Treasury to prepare an SDR policy statement concerning disclosure requirements in connection with matters relating to sustainability, as defined in the Act, whenever it considers appropriate to do so.
  2. Subsections (3) to (5) oblige HM Treasury to consult the FCA and the PRA when preparing an SDR policy statement and to publish it. HM Treasury must keep the SDR policy statement under review and may revise or withdraw it.
  3. Subsections (6) to (10) oblige the FCA and the PRA to provide a report to HM Treasury on any matter required in connection with the preparation of the policy statement if requested by HM Treasury.
  4. Subsection (9) determines that the FCA and the PRA are not prevented or restricted from sharing information with HM Treasury for the purposes of providing reports to HM Treasury by section 348 of FSMA 2000 (Restrictions on Disclosure of Confidential Information), or regulations made under section 349, notably the Financial Services and Markets Act 2000 (Disclosure of Confidential Information) Regulations 2001.
  5. As per subsection (10), the disapplication of section 348 and regulations made under 349 in subsection (9) does not apply in relation to information provided to the FCA or the PRA by a regulatory authority outside the United Kingdom.
  6. New section 416B imposes an obligation on the FCA and the PRA to have regard to any published HM Treasury SDR policy statement before making rules or issuing guidance in connection with disclosure concerning matters relating to sustainability.
  7. Subsections (3) and (4) insert new provisions into Schedule 1ZA of FSMA 2000 (FCA annual report) and Schedule 1ZB of FSMA 2000 (PRA annual report) requiring the FCA and the PRA, separately, to report about how they have satisfied the requirement in section 138EA(2) of FSMA 2000 (matters to consider when making rules) in relation to disclosure concerning matters relating to sustainability and the obligation in section 416B(1) to have regard to the SDR policy statement.

Digital settlement assets

Section 22: Digital settlement assets

  1. This section introduces Schedule 6 which provides for the regulation of payment systems using digital settlement assets, digital settlement asset service providers and service providers to digital settlement asset systems by way of extending Part 5 of the Banking Act 2009 and Part 5 of FSBRA 2013 with additional provision for addressing occurrences of regulatory overlap in that context.

Section 23: Digital settlement assets: power to make regulations

  1. Subsection (3)(a) to (i) gives HM Treasury the power to make regulations to regulate payments that include digital settlement assets.
  2. Subsections (3)(a) to (e) clarifies the nature of legislative provisions that HM Treasury may enact in pursuance of that aim. Subsection (3)(b) provides that the power includes the power to apply, and amend, existing legislation on insolvency arrangements (including administration, restructuring and similar procedures – as provided for in (1)(c) to apply appropriately for digital settlement assets used in payments. Subsection (3)(c) confers powers on HM Treasury to legislate, which will be relevant when amending primary legislation to include regulation making powers with respect to digital settlement assets. These are intended to bring digital settlement assets within the existing legislative perimeter of payments and electronic money regime, address regulatory overlaps and amend the application of existing SARs to cater for digital settlement asset features and operations.
  3. Subsection (4) allows HM Treasury to make provision for creating offences punishable on summary conviction with respect to digital settlement assets. This could include expanding existing criminal offences that apply to existing authorised payment institutions and authorised electronic money institutions under the EMR 2011 and PSR 2017 to apply to digital settlement assets.
  4. Subsection (5) clarifies that the power to make such regulations includes the power to modify legislation (which under section 80(1) includes the power to amend, repeal or revoke existing legislation). For instance, this could be relevant where HM Treasury needs to amend existing legislation, such as the EMR 2011, to apply to digital settlement assets.
  5. Subsections (7) and (9) to (12) sets out the procedure in which such legislation may be made and confirms that such regulations made under these provisions will be subject to the affirmative procedure or if urgent, that the "made affirmative" procedure be used. This procedure could be relevant if HM Treasury needs to react urgently to developments within the cryptoasset market. Subsection (8) imposes the requirement on HM Treasury to consult with the regulators before laying draft regulations under this power.
  6. Subsection (13) is self-explanatory.

Mutual recognition

Section 24: Implementation of mutual recognition agreements

  1. Subsection (1) allows HM Treasury to make, by regulations, any such provision as it considers appropriate for the purpose of, or in connection with, implementing MRAs to which the UK is or is expected to become a party.
  2. Subsections (2) and (3) clarify the meaning of "mutual recognition agreement". This would include a full-fledged MRA which covers all financial services sectors, as well as more bespoke MRAs which cover only specific financial services or markets sectors or activities. It would also include mutual recognition provisions on financial services contained within other international agreements such as free trade agreements. As per subsection (5), it would also extend to any future amendments or modifications to existing MRAs. The definition would not include any parts of international agreements which are not related to mutual recognition in the field of financial services or markets.
  3. Subsections (4) and (6) provide further clarification as to the provision which may be made by regulations under subsection (1). This includes conferring powers on HM Treasury or the financial services regulators and imposing duties on those regulators. Duties may only be imposed where considered appropriate by HM Treasury. The appropriateness of such duties will be considered, where relevant, in the context of the relevant regulator’s obligations in FSMA 2000 with respect to the advancement of its statutory objectives. Such regulations may modify (including amending repealing or revoking, as per subsection (11)) primary and subordinate legislation, as well as retained EU law. This will enable HM Treasury to give domestic effect to the recognition accorded under an MRA. For example, if an MRA provides for recognition of an MRA partner country’s framework in relation to a sector or activity not covered by an existing equivalence regime, the power could be used to create a new domestic recognition regime or to amend the scope of existing regimes to allow for such recognition.
  4. HM Treasury may also impose duties on the regulators, including a duty to make rules. HM Treasury is required to consult the relevant regulator before doing so, pursuant to subsection (7). Subsections (8) and (9) further provide that if HM Treasury imposes a duty on a regulator to make rules, this may (among other things) specify matters that the rules must cover and specify a period within which the rules must be made. This ensures that HM Treasury can delegate aspects of implementation of MRAs to regulators where appropriate, but that it may not specify the precise form or content of the regulators’ rules.
  5. Subsection (10) applies the affirmative procedure to regulations made under subsection (1).

Chapter 3: Accountability of regulators

FCA and PRA objectives and regulatory principles

Section 25: Competitiveness and growth objective

  1. This section adds new secondary objectives for the PRA and the FCA in relation to growth and international competitiveness.
  2. Subsection (2) inserts a new subsection (4A) into FSMA 2000 which requires the FCA to, so far as is reasonably possible, advance the competitiveness and growth objective when discharging its general functions.
  3. Subsection (3) inserts a new section (1EB) into FSMA 2000 which sets out what the competitiveness and growth objective is. The facilitation of the objective by the FCA is subject to the FCA aligning with relevant international standards.
  4. Subsection (4a) changes the title in section 2H of FSMA 2000 to account for the new secondary objective.
  5. Subsection (4b) substitutes the existing subsection (1) of section 2H of FSMA 2000 to add a requirement for the PRA to, so far as is reasonably possible, advance the competitiveness and growth objective when discharging its general functions.
  6. Subsection (4b) inserts a new section (1B) into FSMA 2000 which sets out what the competitiveness and growth objective is. The facilitation of the objective by the PRA is subject to the PRA aligning with relevant international standards.

Section 26: Competitiveness and growth objective: reporting requirements

  1. Subsection (1) requires the FCA and the PRA to produce two reports each on how they have advanced the competitiveness and growth objective.
  2. Subsection (2) sets out a short, non-exhaustive list of what the reports must explain.
  3. Subsections (3) and (4) specify when the two reports must be made and the periods to which each of the reports must relate.
  4. Subsections (5) and (6) require HM Treasury to lay a copy of each report before Parliament, and require the FCA and the PRA to publish the reports.
  5. Subsection (7) defines the "regulator" and references to the competitiveness and growth objective.

Section 27: Regulatory principles

  1. This section embeds the targets made by the Secretary of State under the Climate Change Act 2008 and Environment Act 2021 into the regulatory principles for the PRA and the FCA. The FCA and PRA determine whether the exercise of their functions is relevant to the need to contribute to the net zero target and the environmental targets made by the Secretary of State. Where the regulator determines that the function is relevant, the regulator must have regard to the regulatory principle in section 3B(1)(c) of FSMA 2000.

Section 28: sections 25 and 27: consequential amendments

  1. This section sets out minor and consequential amendments to FSMA 2000 as a result of the new competitiveness and growth objective introduced by section 25 and the new regulatory principle that refers to the net zero emissions target.
  2. Subsection (2) amends section 1JA of FSMA 2000 to require the FCA to have regard to recommendations by HM Treasury when considering how to discharge its duty to advance the international competitiveness and growth objective.
  3. Subsection (3) amends section 1K of FSMA 2000 to clarify that the reference to the FCA’s objectives includes the international competitiveness and growth objective.
  4. Subsection (4) amends section 2I of FSMA 2000 to clarify that the reference to the PRA’s objectives includes the international competitiveness and growth objective.
  5. Subsection (5) amends section 3B of FSMA 2000 to clarify that the definition of ‘objectives’ includes the international competitiveness and growth objective.
  6. Subsection (6) amends section 3D of FSMA 2000 to ensure that the international competitiveness and growth objective is included in the requirement for the FCA and the PRA to ensure co-ordinated exercise of their functions.
  7. Subsection (7) amends 138I of FSMA 2000 to require the FCA to explain how its proposed rules advance the international competitiveness and growth objective when it consults on draft rules.
  8. Subsection (8) amends the duty for the FOS to provide information to the FCA so that it includes information that relates to the international competitiveness and growth objective.
  9. Subsection (9) amends section 143G of FSMA 2000 to make consequential amendments to provisions which are redundant following the introduction of the amended sustainable growth principle.
  10. Subsection (10) amends paragraph 11 of Schedule 1ZA to FSMA 2000 and requires the FCA to report annually on how it has advanced its international competitiveness and growth objective through its annual report.
  11. Subsection (11) amends paragraph 20 of Schedule 1ZB to FSMA 2000 and requires the PRA to report annually on how it has advanced its international competitiveness and growth objective through its annual report.

FCA and PRA powers to make rules etc

Section 29: Review of rules

  1. This section amends FSMA 2000 to introduce requirements relating to the review of rules made by the regulators.
  2. New section 3RA(1) introduces a requirement for the regulators to keep generally under review any rules made by the regulator, with subsection (2) exempting rules made for the purpose of complying with directions or recommendations from the Financial Policy Committee. If the relevant direction or recommendation is withdrawn, the rules made to comply with the direction or recommendation will no longer fall under the exemption in subsection (2).
  3. New section 3RB requires each regulator to prepare and publish statements of policy on how they will carry out their obligations under new section 3RA. Subsection (3) requires publication to be in a way appearing to the regulator to be best designed to bring it to the attention of the public.
  4. Subsection (2) requires the statements of policy to include information on how stakeholders can make representations de to the regulators on the review of rules, and the arrangements to ensure those representations are considered.
  5. New section 3RC provides HM Treasury with the power to direct the regulators to review specified rules.
  6. Subsection 3RC(1)(a) requires that the rules have been in force for at least 12 months. 3RC(1)(b) sets out that HM Treasury must consider it to be in the public interest that the rules are reviewed. Subsection (1)(c) clarifies that HM Treasury can only direct the regulator to carry out a review if, in the opinion of HM Treasury, the regulator is not already carrying out, or planning to carry out, an effective review of the rules in question.
  7. Subsection (2) clarifies that the scope of the power is those rules which fall under the regulators general duty to review rules in new section 3RA(1).
  8. Subsection (3) requires HM Treasury to consult the regulator before giving a direction under the power.
  9. Subsection (4) specifies that HM Treasury must have regard to the desirability of minimising any adverse effect that the carrying out of the review may have on the regulator. Subsection (5) sets out what a direction may include. Subsection (6) sets out what may be included in the scope and conduct of a review. Subsection (7) sets out the requirement for HM Treasury to lay the direction before Parliament and publish it before giving a direction. Subsection (8) disapplies subsection (7) where HM Treasury considers that publication would not be in the public interest. Subsection (9) allows a direction to be varied or revoked by a further direction.
  10. New section 3RD requires reports to be made by the regulator on reviews under new section 3RC. Section 3RD(1) states that section 3RD applies where HM Treasury has given a direction to a regulator under section 3RC(1). Subsection (2) sets out the matters that must be contained in the regulator’s report.
  11. Subsection (3) requires HM Treasury to lay a copy of the report before Parliament and publish it. Subsection (4) provides a public interest exemption to subsection (3).
  12. Schedule 7 inserts into FSBRA 2013 corresponding provisions for the PSR.

Section 30: Treasury power in relation to rules

  1. This section inserts new section 3RE into FSMA 2000.
New section 3RE
  1. Subsection (1) of new section 3RE creates a power for HM Treasury to require a regulator to use one of their rule-making powers to make rules. HM Treasury can require a regulator to use any of the rule-making powers in or under FSMA 2000, but it does not apply to any regulator powers outside FSMA 2000 unless the relevant Parts of FSMA 2000 have been applied.
  2. Subsection (2)(a) of new section 3RE enables HM Treasury to specify matters that the rules must cover. Subsection (2)(b) of the new section enables HM Treasury to set a time limit within which the relevant regulator must make the rules necessary to fulfil the requirement set by HM Treasury.
  3. Subsection (3) limits the power to the matters covered by subsection 2(a) – i.e. the requirement that the regulator make rules covering specified matters. Subsection 3(a) states that the power cannot be used to require a regulator to structure their rules in a particular way or to include certain content. And subsection 3(b) states that the power cannot be used to achieve a particular outcome.
  4. Subsection (4) of new section 3RE clarifies that, if no time period within which rules must be made is specified by HM Treasury under subsection (2)(b), the relevant regulator is required to make the rules as soon as is practicable.

Section 31: Matters to consider when making rules

  1. This section inserts new Section 138EA into FSMA 2000.
  2. Within this, subsection (1) of new Section 138EA states that this section applies to all regulator rule-making empowerments within FSMA 2000, meaning that it is applicable whenever a regulator proposes to make rules in or under the Act. It therefore has the same scope as new Section 3RE, as inserted by section 30.
  3. 138EA(2) and (3) provide HM Treasury with a power to specify matters that the regulators must have regard to when making rules in a particular area. HM Treasury is able to specify different matters that must be considered when rules are made in different areas.
  4. 138EA(4) enables HM Treasury to limit the matters which must be considered such that it can apply to only a subset of regulator rule-making, including by references to the power exercised by the regulator, the persons to whom the rules apply, or the activities or subject matter concerned.
  5. 138EA(5) provides an exemption to the consideration of matters specified by HM Treasury where rules are made in order to comply or act in accordance with a direction or recommendation made by the Financial Policy Committee of the Bank of England.
  6. 138EA(6) is self-explanatory.
  7. Subsection (3) of this section inserts a number of provisions into section 138I of FSMA 2000.
  8. Subsection (3)(a) inserts new subsection 138I(2)(ba) which places a requirement on the FCA to include within a consultation an explanation of the how the consideration of matters specified by HM Treasury using the power in 138EA has affected the draft rules proposed in their consultation.
  9. Subsection (3)(b) inserts new subsection 138I(8A) which exempts the FCA from complying with the requirement in new subsection 138I(2)(ba) if compliance would cause an undue delay which would be damaging to consumer interests or if the proposed rules make changes to pre-existing rules that are non-material in the opinion of the FCA. The new subsection 138I(8B) is self-explanatory.
  10. Subsection 4 inserts a number of provisions into 138J of FSMA 2000.
  11. Subsection (4)(a) inserts new subsection 138J(2)(ba). This has the same effect on the PRA’s consultation requirement as new subsection 138I(2)(ba) has on the FCA’s consultation requirements.
  12. Subsection (4)(b) inserts new subsection 138J(8A). This exempts the PRA from complying with the requirement in new subsection 138J(2)(ba) if compliance would cause an undue delay. The conditions that this exemption is subject to in 138J(8A)(a)(i) and 138J(8A)(a)(ii) are based on the PRA’s statutory objectives. The new subsection 138J(8A)(b) exempts the PRA from the requirement in new subsection 138J(2)(ba) if the proposed rules make changes to pre-existing rules that are non-material in the opinion of the PRA. The new subsection 138J(8B) is self-explanatory.
  13. Subsection (5) inserts new section 138EA into section 429 of FSMA 2000 which provides that SIs made under this power are subject to the affirmative Parliamentary procedure.

Section 32: Effect of rules etc on deference decisions

  1. This section amends FSMA 2000 by inserting a new section 409A, requiring the FCA and the PRA to consider the effect of a relevant action on notified HM Treasury deference decisions and consult HM Treasury if it considers there to be a material risk that the action would be incompatible with a notified deference decision.
  2. Subsection (1) outlines that this mechanism will apply only in scenarios where the FCA and the PRA propose to take a "relevant action".
  3. Subsection (2) requires the PRA or the FCA to consider the effect of the relevant action on notified deference decisions. If the PRA or the FCA considers there is a material risk that the action would be incompatible with a notified decision, it must consult HM Treasury about the likely effect of the action on the decision.
  4. Subsection (3) limits the requirements in subsection (2) to situations where the PRA or the FCA proposes to take a relevant action, and a duty to consult publicly applies in respect of the action. Subsection (6) provides that a "duty to consult" (publicly) for the purposes of subsection (3) means i) a duty imposed by sections 138I or 138J FSMA 2000 to publish draft rules, or ii) any other duty to publish the proposal to take the action- examples of (ii) include duties under common law, or a statutory requirement under Article 42(3) of Regulation (EU) No 600/2014 of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Regulation (EU) No 648/2012 (Retained EU Legislation). If there is no duty to consult as defined in subsection (6), which includes circumstances where the FCA or the PRA are relying on an exemption from the duty to consult, the test in subsection (3) is not satisfied. Examples of such exemptions applicable to the regulator include section 138L FSMA 2000 (Consultation: general exemptions) and Article 42(4) of Regulation (EU) No 600/2014 of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Regulation (EU) No 648/2012 (Retained EU Legislation). Note that the treatment of the exemption in section 138M(1) of FSMA 2000 (consultation: exemptions for temporary product intervention rules) has been modified for the purposes of new section 409A.
  5. Subsection (4) defines what constitutes a "relevant action" under this section. These are if the PRA or the FCA proposes to make rules under FSMA 2000 or any other enactment, or make changes to its general policies and practices relating to their respective supervisory remits.
  6. Subsection (5) defines key concepts for the purposes of the requirement outlined in subsection (2).
  7. Subsection (6) defines the "duty to consult" test set out in subsection (3).
  8. Subsection (7) states that section 138M(1), which is the FCA’s exemption relating to temporary product intervention rules, should be ignored for the purposes of assessing whether there is a "duty to consult" for the purposes of subsection (6). Subsection (7) should be read alongside subsections (9)(a) and (10) which introduce a narrower exception from the requirement in subsection (2) in relation to product intervention rules for the purposes of new section 409A.
  9. Subsection (8) requires the PRA or the FCA, when fulfilling the consultation requirement outlined in subsection (2), to consult HM Treasury prior to consulting publicly.
  10. Subsection (9) creates certain exceptions to the requirement in subsection (2). The requirement in subsection (2) does not apply when there is an existing duplicative requirement elsewhere in FSMA 2000. Subsection (9) further exempts the regulator from the requirement where the proposed action has been undertaken to comply with a direction given by the Financial Policy Committee of the Bank of England or to act in accordance with a recommendation made by the same committee.
  11. Subsection (10) provides the condition for subsection (9)(a) to apply, and covers situations where the FCA considers that delay involved in complying with the requirement in subsection (2) would be prejudicial to advancing a) the consumer protection objective or b) if an order under section 137D(1)(b) of FSMA 2000 is in force, the integrity objective.

Section 33: Effect of rules etc on international trade obligations

  1. This section amends FSMA 2000 by inserting a new section 409B, requiring the FCA and the PRA to notify HM Treasury of a relevant action if they consider there to be material risk that the action would be incompatible with the UK’s international trade obligations.
  2. Subsection (1) outlines that this mechanism will apply only in scenarios where the FCA or the PRA propose to take a "relevant action" and considers there to be a material risk that the action would be incompatible with an international trade obligation. Under subsection (12), the only international trade obligations which the regulator must consider for the purposes of this section are the UK’s obligations relating to financial services or markets under free trade agreements or the 1994 Marrakesh Agreement which established the World Trade Organisation.
  3. Subsection (2) requires the regulator to give HM Treasury written notice of the proposed action before taking it (see separately the requirement under subsections (10) and (11)).
  4. Subsection (3) limits the notification requirement in subsection (2) to situations where the regulator proposes to take a relevant action, and a duty to consult publicly applies in respect of the action.
  5. Subsection (4) defines what constitutes a "relevant action" under this section. These are if the PRA or the FCA propose to make rules under FSMA 2000 or any other enactment, or make changes to its general policies and practices relating to their respective supervisory remits.
  6. Subsection (5) provides that a "duty to consult" (publicly) for the purposes of subsection (3) means i) a duty imposed by sections 138I or 138J FSMA 2000 to publish draft rules, or ii) any other duty to publish the proposal to take the action. Examples of (ii) include duties under common law, or a statutory requirement under Article 42(3) of Regulation (EU) No 600/2014 of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Regulation (EU) No 648/2012 (Retained EU Legislation). If there is no duty to consult as defined in subsection (5), including where the FCA or the PRA are relying on an exemption from the duty to consult, the test in subsection (3) is not satisfied. Examples of such exemptions applicable to the regulator include section 138L FSMA 2000 (Consultation: general exemptions) and Article 42(4) of Regulation (EU) No 600/2014 of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Regulation (EU) No 648/2012 (Retained EU Legislation). Note that the treatment of the exemption in section 138M(1) of FSMA 2000 (consultation: exemptions for temporary product intervention rules) has been modified for the purposes of new section 409B.
  7. Subsection (6) states that section 138M(1), which is the FCA’s exemption relating to temporary product intervention rules, should be ignored for the purposes of assessing whether there is a "duty to consult" for the purposes of subsection (5). Subsection (6) should be read alongside subsections (8)(a) and (9) which introduce a narrower exception from the requirement in subsection (2) in relation to product intervention rules.
  8. Subsection (7) requires the regulator to give the written notice under subsection (2) prior to consulting publicly in respect of the relevant action.
  9. Subsection (8) also exempts the regulator from the requirement in subsection (2) where the proposed action has been undertaken to comply with a direction given by the Financial Policy Committee of the Bank of England or to act in accordance with a recommendation made by the same committee.
  10. Subsection (9) provides the condition for subsection (8)(a) to apply, and covers situations where the regulator considers that delay involved in complying with the requirement in subsection (2) would be prejudicial to advancing a) the consumer protection objective or b) if an order under section 137D(1)(b) of FSMA 2000 is in force, the integrity objective.
  11. Subsection (10) provides that subsection (11) applies in circumstances where a notification is not made under subsection (2) prior to a relevant action being taken, either because there is no duty to consult publicly in respect of that action or because the exception relating to product intervention rules under subsection (8)(a) applies.
  12. Subsection (11) provides that in those circumstances, the regulator must give written notice to HM Treasury as soon as reasonably possible after taking a relevant action if it appears that there is a material risk that the action is incompatible with an "international trade obligation".

Section 34: Power to disapply or modify rules

  1. This section inserts new section 138BA into FSMA 2000. This Section of FSMA 2000 enables the PRA and the FCA to identify parts of their rules which can be waived or disapplied upon application or consent.
  2. Within this, subsection (1) of new section 138BA states that new section 138BA only applies to rules made by a regulator if, or to the extent that, HM Treasury provides for it to apply in regulations.
  3. 138BA(2) states that, where provided for in subsection 1, a regulator can grant a permission to a person who is subject to their rules, on their application or with their consent.
  4. 138BA (2)(a) and (b) specify what a permission granted by the relevant regulator can enable. The regulator is able to disapply the rules entirely or to continue to apply the rules but with modifications specified in the permission.
  5. 138BA (3) states that the PRA and the FCA cannot grant in relation to rules made under these listed sections of FSMA 2000.
  6. 138BA (4)(a) states that the relevant regulator may grant an authorised person permission to disapply or modify the rules subject to conditions. The regulator will set these conditions.
  7. 138BA(4)(b) makes provision for the regulators to revoke or vary permission under new section 138BA.
  8. 138BA(5) enables HM Treasury to set procedural requirements in relation to the granting of a permission in regulations under subsection (1). 138BA(6) is a list of possible provision about procedural matters that may be made under subsection (5). This list is indicative and provision under subsection (5) may include provision about other matters.
  9. 138BA(7) places an obligation on HM Treasury to consult the relevant regulator prior to making regulations under subsection (1).
  10. Subsection (3) of this section inserts new section 138BA into section 429 of FSMA 2000 which provides that SIs made under this power are subject to the affirmative Parliamentary procedure.

FCA and PRA engagement

Section 35: Responses to recommendations of HM Treasury

  1. This section amends section 1JA of FSMA 2000 and section 30B of the Bank of England Act 1998, respectively, to require annual responses from the FCA and the Prudential Regulation Committee to HM Treasury recommendations.
  2. Section 33(2) inserts subsection (2A) into section 1JA of FSMA 2000 which requires the FCA and the Prudential Regulation Committee to respond to the recommendations explaining the action that the relevant regulator has taken or intends to take in accordance with the recommendation, or the reasons why the relevant regulator has not acted or does not intend to act in accordance with the recommendation.
  3. Section 33(2) inserts subsection (2B) and (2C) into section 1JA of FSMA 2000 to make this requirement annual.
  4. Section 33(2) also inserts subsection (2D) into section 1JA of FSMA 2000 to remove the requirement where HM Treasury has notified the FCA in writing that an update (or further update) is not required.
  5. Section 33(2) inserts subsection (2E) into section 1JA of FSMA 2000 to allow the FCA to withhold information where its publication would be against the public interest.
  6. Section 33(4) does the same for the Prudential Regulation Committee as section 33(2) does for the FCA.
  7. Schedule 7 to this Act inserts corresponding provisions into FSBRA 2013 in relation to the PSR.

Section 36: Public consultation requirements

  1. This section requires the FCA and the PRA to provide information in their public consultations on any engagement they have had with the statutory stakeholder panels established for the FCA, the PRA and the PSR prior to that consultation. Reference to public consultations include non-statutory consultations.

Section 37: Engagement with statutory panels

  1. This section will require the FCA and the PRA to publish information in their annual reports on how they have engaged with the statutory stakeholder panels established for the FCA, the PRA and the PSR.
  2. The section also requires the FCA and the PRA to include information in their annual reports on how they have complied with the processes and considerations set out in their statements of policy on panel appointments.
  3. The section also requires the FCA and the PRA to provide information in their public consultations on any engagement they have had with these statutory panels prior to that consultation. Reference to public consultations include non-statutory consultations.
  4. Equivalent provision is made for the PSR in relation to its engagement with its statutory panel in Schedule 7 to this Act. This amends the existing requirements of the PSR in relation to its annual report in Schedule 4 to FSBRA 2013, and inserts a new section 104A into FSBRA 2013.

Section 38: Engagement with Parliamentary Committees

  1. This section amends FSMA 2000 to require the FCA and the PRA to notify the Treasury Select Committee, a relevant Lords committee, and a relevant joint committee when the regulators publish a consultation on any matter and that they must respond to any Parliamentary Committee that has responded to a consultation published by the regulators.
  2. Subsection (2) amends Part 4 of Schedule 1ZA to FSMA 2000. Subsection (2) inserts paragraph 28 into Part 4 and sets out the requirement for the FCA to notify the relevant Parliamentary committees when it publishes a consultation. It also sets out that the relevant committee of the House of Lords and the relevant joint committee are committees that have been charged with responsibility for the purposes of the paragraph, and which have informed the FCA of this.
  3. Subsection (2) also inserts paragraph 29 into Part 4 of Schedule 1ZA to FSMA 2000 which sets out the requirement that the FCA must respond to any Parliamentary Committee that has responded to a consultation published by the regulators. The qualification in new paragraph 29(5) that the FCA does not need to supply any information that they consider is against the public interest operates only as a qualification of the new statutory duty itself. It does not purport to speak for any wider purpose (and, therefore does not purport to limit the inherent jurisdiction of Parliament to require the production of papers or to summon witnesses).
  4. Subsection (3) inserts paragraph 36 into Part 4 of Schedule 1ZB to FSMA 2000 and sets out the requirement for the PRA to notify the relevant Parliamentary committees when it publishes a consultation. It also sets out that the relevant committee of the House of Lords and the relevant joint committee are committees that have been charged with responsibility for the purposes of the paragraph, and which have informed the PRA of this.
  5. The qualification in new paragraph 36(5) that the PRA does not need to supply any information that they consider is against the public interest operates only as a qualification of the new statutory duty itself. It does not purport to speak for any wider purpose (and therefore does not purport to limit the inherent jurisdiction of Parliament to require the production of papers or to summon witnesses).
  6. Subsection (3) also inserts paragraph 37 into Part 4 of Schedule 1ZB to FSMA 2000 which sets out the requirement that the PRA must respond to any Parliamentary Committee that has responded to a consultation published by the regulators.

Section 39: Reporting requirements

  1. This section inserts new paragraph 11A into Schedule 1ZA of FSMA 2000, which provides HM Treasury with a power to direct the FCA to publish a report containing information about matters specified by HM Treasury.
  2. Subsection (2) of this section inserts new paragraph 11A(1) which enables HM Treasury to direct the FCA to publish information, subject to conditions.
  3. Paragraph 11A(2) sets the conditions under which HM Treasury can direct the FCA, relating to the necessity of information for scrutiny of the regulator and the availability of existing information.
  4. Paragraph 11A(3) requires the FCA to publish a report in line with the direction. Paragraph 11A(4) exempts information from this publication that it would be against the public interest to publish.
  5. Paragraph 11A(5) places conditions on the provision of information in a direction, in that a direction cannot require the FCA to report more than once a quarter, nor to publish information that is confidential for the purposes of Part 23 of FSMA 2000.
  6. Paragraphs 11A(6) and 11A(7) are self-explanatory.
  7. Paragraph 11A(8) is self-explanatory.
  8. Paragraph 11A(9) allows HM Treasury to vary or revoke directions under the power.
  9. Sub-section (3) inserts paragraph 21A into Schedule 1ZB to FSMA 2000 which sets out the same power to direct the regulator to publish a report containing information about matters specified by HM Treasury, but in relation to the PRA.

Cooperation of FCA, PRA and others

Section 40: Duty to co-operate and consult in exercising functions

  1. This section introduces a statutory requirement for the FCA, the Financial Ombudsman Service and the FSCS to cooperate on issues which have significant implications for each other or the wider financial services market.
  2. Subsection 3 requires the FCA, the Financial Ombudsman Service and the FSCS to publish a statement explaining how they will comply with the duty.
  3. Subsection 6a requires the FCA, the Financial Ombudsman Service and the FSCS to publish an annual report on their compliance with the duty. This report must also describe representations the authorities have received from stakeholders on their compliance with the duty to cooperate on wider implications issues (subsection 7).

FCA and PRA panels and policy statements

Section 41: Listing Authority Advisory Panel

  1. The section will place the Listing Authority Advisory Panel on an equal footing with the regulators’ current statutory panels.

Section 42: Insurance Practitioner Panel

  1. The section will place the PRA Practitioner Panel’s Insurance Sub-committee on an equal footing with the regulators’ current statutory panels.

Section 43: Cost Benefit Analysis Panels

  1. This section will require the FCA and the PRA to establish and maintain a new statutory panel each ("the CBA Panel") which is dedicated to supporting the development of the regulators’ CBA. The regulators should consult their CBA Panel before publication of consultations on rules, except for circumstances where there is an exemption. The CBA Panels will also be able to review the regulators’ CBA methodology and processes by examining published CBAs. The CBA Panels will be on equal footing with the existing statutory panels and those panels which will be placed on a statutory footing. The regulators will each be required to appoint at least two persons from authorised firms to their panels.

Section 44: Statement of policy on cost benefit analyses

  1. This section will create a new statutory requirement for the regulators to each publish a statement of policy on their approach to Cost Benefit Analyses. This statement will set out when a CBA is conducted and what a CBA consists of.

Section 45: Statement of policy on panel appointments

  1. This section will create a requirement for the regulators and publish statements of policy which set out their processes for appointing members to their statutory panels. Prior to publishing their respective statements of policy, the regulators will be required to consult HM Treasury and have regard to any representations HM Treasury make in response.

Section 46: Composition of panels

  1. This section inserts new sections after section 1M of FSMA 2000 (FCA’s general duty to consult), after section 2L of FSMA 2000 (PRA’s general duty to consult), and after section 103(5) of FSBRA 2013 (regulator’s general duty to consult) to require the FCA, the PRA, and the PSR, when appointing persons to their statutory panels, to ensure all members are external to the FCA, the PRA, the PSR, the Bank of England, and HM Treasury.
  2. Subsection (2) inserts section 1MA into FSMA 2000 (composition of panels) which sets out that a person who receives remuneration from the FCA, the PRA, the PSR, the Bank of England, or HM Treasury is disqualified from being appointed as a member of a panel established under any of sections 1N to 1QA or 138IA of FSMA for the FCA. Section 1MA(2), as inserted by subsection (2) of this section, sets out that section 1MA(1) does not apply in respect of a panel if regulations made by HM Treasury provide for it not to apply to that panel. Section 1MA(3), as inserted by subsection (2) of this section, sets out that regulations made by HM Treasury using the power in sections 1MA(2) may include provision in respect of a panel generally, or in relation to descriptions of persons or cases, but that such regulations may not be exercised so as to specify these persons by name.
  3. Subsections (3) to (6) of section 46 make sections 1N (FCA Practitioner Panel), 1O (Smaller Business Practitioner Panel), 1P (Markets Practitioner Panel), and 1Q (Consumer Panel) of FSMA 2000 subject to section 1MA of FSMA 2000 as inserted by this section.
  4. Subsection (7) of this section inserts section 2LA (PRA’s general duty to consult) into FSMA 2000 which replicates, with appropriate amendments, the wording of section 1MA of FSMA 2000 for the PRA.
  5. Subsection (8) of this section makes section 2M (the PRA Practitioner Panel) of FSMA 2000 subject to section 2LA of FSMA 2000. Subsection (9) of this section inserts sections (5A) to (5C) into section 103 of FSBRA 2013 which replicate, with appropriate amendments, the wording of section 1MA of FSMA for the PSR.

    6. Section 47: Panel reports

  6. Subsections (1) and (2) permit HM Treasury, by regulations, to require specified statutory panels to produce annual reports to HM Treasury and to make provision about the contents of those reports.
  7. Subsections (3) and (4) require HM Treasury to lay a copy of each report before Parliament, and require the statutory panel to publish the report in such manner as it thinks fit.
  8. Subsection (5) defines statutory panels for the purposes of this section.
  9. Subsection (6) provides that regulations made under this section are subject to the negative procedure.

Bank of England regulatory powers

Section 48: Exercise of FMI regulatory powers

  1. This section inserts new sections 30D to 30I into the Bank of England Act 1998. They make new provision concerning the Bank’s exercise of its regulatory powers as follows. 
  2. Section 30D sets out the statutory objectives for the Bank to follow in the exercise of its FMI functions (which are defined in section 30D(3)). FMI functions, as defined, will include the Bank’s role in implementing a new Senior Manager & Certification Regime for CCPs and CSDs as well its powers over critical third parties when relevant powers in that regime are exercised in relation to a critical third party who provides services to CCPs and CSDs. Subsection (1) maintains the Bank’s Financial Stability Objective as its primary objective, and further provides that when advancing this objective the Bank should have regard to:
    1. The regulatory principles set out in section 30E; 
    2. The effect that the Bank’s regulation will or may have on the financial stability of other countries or territories in which CCPs and CSDs are established or provide services; and   
    3. The desirability of regulating CCPs and CSDs in a way that is not determined by whether the users of their services are located in the UK or elsewhere.   
  3. Subsection (2) provides for a new secondary objective for the Bank when exercising its FMI functions, which is to be advanced as far as reasonably possible alongside the Financial Stability Objective. This is to facilitate innovation in the services provided by central counterparties and CSDs, with a view to improving the quality, efficiency and economy of those services.
  4. Section 30E of the Bank of England Act 1998 sets out the regulatory principles to which the Bank must have regard when exercising its FMI functions. These are based on the existing principles set out in section 3B of FSMA 2000 which apply to the FCA and the PRA. Section 30E includes a requirement for the Bank to have regard to the desirability of sustainable growth, including in a way which is consistent with the UK’s net zero emissions target and the targets made by the Secretary of State under the Climate Change Act 2008 and Environment Act 2021 when exercising its FMI functions. Where the Bank determines that the exercise of its functions is relevant to the need to contribute to the targets, the regulator must have regard to the regulatory principle in section 30E of the Bank of England Act 1998. The section also includes an additional principle requiring the Bank to have regard to the desirability of facilitating fair and reasonable access to services provided by CCPs and CSDs.
  5. Section 30F creates a committee of the Bank called the ‘Financial Market Infrastructure Committee’ (FMI Committee). It sets out the requirements regarding the membership of this Committee. The Committee must be chaired by either the Governor or a Deputy Governor of the Bank, and it must have at least three independent members. 
  6. Section 30G provides for the functions of the FMI Committee. It will be responsible for exercising the Bank’s FMI functions (which are its regulatory functions in relation to CCPs and CSDs, including setting policy approaches and making rules, and are defined in section 30D). Subsection (1)(b) provides that the Bank’s Court of Directors can confer other functions on the Committee. Subsections (3) and (4) provide that the functions of the Committee can be delegated, for example to Bank officials, where it considers this appropriate, except for its function of making rules or technical standards. Subsection (2) provides that the Committee can provide for certain of its functions to be exercised by the Governor, instead of by the Committee, or that the Committee is only able to exercise a particular function after consulting with the Governor of the Bank.
  7. Section 30H requires the Bank to publish certain information on the new Committee, including roles and membership, meeting and decision-making procedures and arrangements for the exercise of any functions outside of the Committee.
  8. Section 30I provides that HM Treasury may make recommendations on aspects of the government’s economic policy which the Bank should have regard to when advancing its objectives and applying the regulatory principles in relation to its FMI functions. HM Treasury is required to do so at least once every Parliament, and to publish and lay before Parliament its recommendations. The FMI Committee must respond in writing within a year to note what action it has taken, or intends to take, in response to these recommendations (or, if it does not intend to take action in response, its reasons for this). The Committee must then provide an updated response every year unless HM Treasury has informed the Bank that no update is required.

Section 49: Bank of England: rule-making powers

  1. This section amends FSMA 2000 to introduce requirements relating to the review of rules made by the Bank in relation to CCPs and CSDs. New section 300I introduces a requirement for the Bank to keep generally under review any rules made by the Bank under FSMA 2000. Subsection (2) exempts rules made for the purpose of complying with a recommendation from the Financial Policy Committee.
  2. New section 300J requires the Bank to prepare and publish a statement of policy on how they will carry out their obligations under new section 300I. Subsection (5) requires publication to be in a way appearing to the Bank to be best designed to bring it to the attention of the public.
  3. Subsection (2) requires the statements of policy to include information on how stakeholders can make representations to the regulators on the review of rules, and the arrangements to ensure those representations are considered.
  4. New section 300K provides HM Treasury with the power to direct the Bank to review specified rules when this is in the public interest.
  5. Subsection 300K(1)(a) sets out that the rules must have been in place for at least 12 months. Subsection (1)(b) sets out that HM Treasury must consider it to be in the public interest that the rules are reviewed. Subsection (1)(c) clarifies that HM Treasury can only direct so if, in the opinion of HM Treasury, the Bank is not already carrying out, or planning to carry out, an effective review of the rules in question.
  6. Subsection (2) clarifies that the scope of the power is those rules which fall under the Bank’s general duty to review rules in new section 300I.
  7. Subsection (3) requires HM Treasury to consult the Bank before giving a direction under the power.
  8. Subsection (4) requires HM Treasury to consider the effect of any direction under the power on the exercise of the Bank’s other functions. Subsections (5) and (6) clarify various matters that may be included in a direction issued under this section. Subsection (7) requires HM Treasury to lay any direction under the power in Parliament and publish it. Subsection (8) provides a public interest exemption to subsection (6).
  9. Subsection (9) allows for HM Treasury directions under the power to be varied or revoked by further directions.
  10. New section 300L requires reports to be made by the Bank on reviews under new section 300K. Subsection (2) defines the matters that must be contained in the Bank’s report.
  11. Subsection (3) requires HM Treasury to lay the report before Parliament and publish it. Subsection (4) provides a public interest exemption to subsection (3).
  12. The section also inserts a new section 300M into FSMA 2000. Subsection (1) of new section 300M creates a power for HM Treasury to require the Bank to use its rule-making power under FSMA 2000 to make rules in relation to a specified activity or description of person.
  13. Subsection (2)(a) of new section 300M enables HM Treasury to list elements that the Bank must include within the rules. Subsection (2)(b) enables HM Treasury to set a time limit within which the Bank must make the rules necessary to fulfil the requirement set by HM Treasury.
  14. Subsection (3) limits the power to the matters covered by subsection (2)(a), i.e. the requirement that the Bank make rules covering specified matters. Subsection (3)(a) states that the power cannot be used to require the Bank to structure their rules in a particular way or to include certain content. And subsection (3)(b) states that the power cannot be used to achieve a particular outcome.

Section 50: Application of FSMA 2000 to FMI functions

  1. This section makes several amendments to Part 18 and Schedule 17A to FSMA 2000 to ensure that they function in a way which is appropriate for the Bank’s new regulatory framework and its new general rule-making power. For example, subsection (8) applies section 166A of FSMA 2000 to the Bank, which allows for the appointment of a skilled person to investigate a potential breach of a requirement to collect and keep up to date information.
  2. The section also amends Schedule 17A to make provision in relation to the Bank which aligns with measures being introduced for the PRA and the FCA as follows: 
    1. It applies new section 1RB, which will be inserted into FSMA 2000 by section 36 of this Act, to the Bank. This will require the Bank to include in its public consultations information about the statutory panels of the FCA, the PRA and Payment Systems Regulator that it has engaged with in relation to the subject matter of the consultation.
    2. It applies new section 138BA, which will be inserted into FSMA 2000 by section 34 of the Act, to the Bank. This will provide for the Bank to be able to disapply or modify rules in individual cases. 
    3. It applies new section 138EA, which will be inserted into FSMA 2000 by section 31 of this Act, to the Bank. This confers power on HM Treasury to set out in regulations matters which the Bank must consider when making rules. 
    4. It applies new section 138JA(2), (3), (4), (9) and (10) and section 138JB, which will be inserted into FSMA 2000 by section 44 and as a result of which the Bank will be required to consult the PRA Cost-Benefit Advisory Panel (which is established by section 138JA), and to publish a statement of policy for its cost-benefit analyses. 
    5. It applies section 141A of FSMA 2000, and new section 141B, which will be inserted into FSMA 2000 by section 65, to the Bank. This will enable HM Treasury to make amendments to legislation which are consequential on Bank rules and references to Bank rules. 
    6. It applies new sections 409A and 409B, which will be inserted into FSMA 2000 by sections 32 and 33, subject to modifications. As a result of which the Bank will be subject to obligations to consult or notify HM Treasury (as applicable) in relation to the effect of certain actions on notified deference decisions and their compatibility with international trade obligations. 
    7. It introduces a new requirement to paragraph 33 (a) of the Schedule for the Bank to set out in its Annual Report the efforts it has made to engage with interested stakeholders other than CCPs and CSDs, and the results of that engagement.
    8. It applies new paragraph 21A of Schedule 1ZB to FSMA 2000 (which will be inserted into that Act by section 39), and which will provide HM Treasury with a power to direct the Bank to publish a report containing information about matters specified by HM Treasury.
    9. It applies new paragraphs 36 and 37 of Schedule 1ZB to FSMA 2000 (which will be inserted into that Act by section 39), and which will require the Bank to notify the Treasury Select Committee, a relevant Lords committee, and a relevant joint committee when issuing a consultation, publishing draft rules or other proposals, and to provide a written response when a Parliamentary committee makes representations in response to a consultation. The qualification in new paragraph 36(5) that the Bank does not need to supply any information that they consider is against the public interest operates only as a qualification of the new statutory duty itself. It does not purport to speak for any wider purpose (and therefore does not purport to limit the inherent jurisdiction of Parliament to require the production of papers or to summon witnesses).

Payment Systems Regulator’s powers

Section 51: Payment Systems Regulator

  1. This section introduces Schedule 7 which makes amendments to FSBRA 2013.

Section 52: Chair of the Payment Systems Regulator as member of the FCA Board

  1. This section amends FSMA 2000 to make the chair of the PSR board (the PSR Chair) an ex-officio member of the FCA Board.
  2. Subsection 4 provides for the PSR Chair to be a non-executive member of the governing body of the FCA (the FCA Board).
  3. Subsection 5 ensures that the same provisions applying in relation to the Bank of England’s Deputy Governor for prudential regulation apply to the PSR Chair. This includes prohibiting an employee of the PSR being appointed as a member of the FCA Board and allowing for the FCA to pay expenses to the PSR Chair in respect to their service as a member of the FCA Board.
  4. Subsection 6 ensures that the validity of any act of the FCA is not affected by vacancy or defects in the appointment of the PSR Chair to the FCA Board.
  5. Subsection 7 prohibits the PSR Chair, from taking part in discussions or decisions relating to the exercise of the FCA’s function in relation to a particular person, unless the PSR Chair is also the chair of the FCA Board.

Consultation on rules

Section 53: Consultation on rules

  1. Section 138I(1)(b) of FSMA 2000 requires the FCA to, before making any rules, and after consulting the PRA, consult publicly on the proposed rules. Section 138I(2) of FSMA 2000 sets out what must accompany the consultation. Section 138I(4) of FSMA 2000 requires the FCA to publish an account of the representations that have been made to it in response to the consultation and its response to these representations.
  2. The Act inserts new subsections (4A) to (4D) into section 138I of FSMA 2000 that require the FCA to publish the names of respondents to a consultation published under section 138I(1)(b) as part of its response in accordance with section 138I(4). This requirement only applies where a respondent has explicitly provided their consent to the FCA that their response can be published.
  3. New subsection (4D) also requires the FCA’s response to consultations required by section 138I(4) to include an explanation of how representations by Parliamentary committees have been considered.
  4. Section 138J(1)(b) of FSMA 2000 requires the PRA to, before making any rules, and after consulting the FCA, consult publicly on the proposed rules. Section 138J(2) of FSMA 2000 sets out what must accompany the consultation. Section 138J(4) of FSMA 2000 requires the PRA to publish an account of the representations that have been made to it in response to the consultation and its response to these representations.
  5. The Act inserts new subsections (4A) to (4D) into section 138J of FSMA 2000 that requires the PRA to publish the names of respondents to a consultation published under section 138J(1)(b) as part of its response in accordance with section 138J(4). This requirement only applies where a respondent has explicitly provided their consent to the PRA that their response can be published.
  6. New subsection (4D) also requires the PRA’s response to consultations required by section 138J(4) to include an explanation of how representations by Parliamentary committees have been considered.
  7. Paragraph 10(1)(i) of Schedule 17A to FSMA 2000 applies section 138J of FSMA 2000 and the provision inserted by the Act to the Bank of England in respect of its functions in relation to CCPs and CSDs.
  8. The Act inserts a new paragraph into Schedule 17A to FSMA 2000 (paragraph 10A) which applies section 138J of FSMA 2000 and the provision inserted by the Act to the Bank of England in relation to rules made by the Bank of England under section 312M of FSMA 2000.
  9. Section 104(2)(b) of FSBRA 2013 requires the PSR to, before imposing generally applicable requirements, and after consulting the Bank of England, the FCA and the PRA, consult publicly on the proposed rules. Section 104(3) of FSBRA 2013 sets out what must accompany the consultation. Section 104(5) of FSBRA requires the PSR to publish an account of the representations that have been made to it in response to the consultation and its response to these representations.
  10. The Act inserts a new provision into section 104 of FSBRA 2013 that requires the PSR to publish the names of respondents to a consultation published under section 104(2)(b) as part of its response in accordance with section 104(5). This requirement only applies where a respondent has explicitly provided their consent to the PSR that their response can be published.

Part 2: Access to Cash

Section 54: Cash access services

  1. This section inserts Schedule 8, which inserts new Part 8B into FSMA 2000.

Section 55: Wholesale cash distribution

  1. This section inserts Schedule 9, which inserts new Part 5A into the Banking Act 2009 and makes amendments to Part 6 of the Financial Services (Banking Reform) Act 2013.

Part 3: Performance of functions relating to financial market infrastructure

Section 56: Recognised bodies: senior managers and certification

  1. This section inserts Schedule 10, which inserts new Chapter 2A into Part 18 of FSMA 2000.

Part 4: Central counterparties in financial difficulties

Section 57: Central counterparties in financial difficulties

  1. This section inserts Schedule 11, which makes provision for a special resolution regime for central counterparties (CCPs) where all or part of the business has encountered or is likely to encounter financial difficulties.

Part 5: Insurers in financial difficulties

Section 58: Insurers in financial difficulty

  1. Subsection (1) introduces the concept of a "write-down order" and cross-references Schedule 12, which sets out related amendments to FSMA 2000.
  2. Subsection (2) cross-references Schedule 13, which introduces restrictions on the enforcement of contracts against an insurer subject to a write-down order or certain insolvency proceedings.

Part 6: Miscellaneous

Amendments to FSMA 2000

Section 59: Application of provisions to regulatory functions under this Act

  1. This section amends sections 1A and 2AB of FSMA 2000 so that those responsibilities given to the FCA and the PRA in this Act, or could be given to them in the future as a result of regulations made under this Act, are treated as functions of the respective regulator.
  2. Subsection (2) provides that functions under this Act, or regulations made under it, are functions of the FCA.
  3. Subsection (3) provides that functions under this Act, or regulations made under it, are functions of the PRA.

Section 60: Formerly authorised persons

  1. This section amends FSMA 2000 to ensure that the regulators can use their existing powers in sections 168, 205, and 206 and 384 of FSMA 2000 in relation to formerly authorised persons.
  2. Subsection (2) amends section 404C of FSMA 2000 to ensure that it is consistent with new section 415AA.
  3. Subsection (3) inserts new section 415AA into FSMA 2000, which provides that a power in section 168, 205, 206 or 384 of FSMA 2000 may be exercised in relation to persons who were at any time authorised persons (in addition to persons who are authorised persons at the time when the power is exercised). Section 415AA(2) provides that references to "authorised person" in sections 168, 205, 206 to 209 and 384 are to be read as including a person who is no longer authorised.
  4. Subsection (4) provides that the amendments made by this section have effect only in relation to persons who cease to be authorised persons on or after the day on which this Act is introduced.

Section 61: Control over authorised persons

  1. This section inserts an additional scenario where the regulators can impose conditions on a new controller into section 187(2) of Part 12 of FSMA 2000. This additional scenario is where it is desirable to do so in order to advance that regulator’s objectives, subject to the obligation to disregard the economic needs of the market.

Section 62: Financial services compensation scheme

  1. This section amends section 212(3)(aa) and repeals section 218B of FSMA 2000 as set out in subsections (2) and (3) to remove the requirement that the chief executive should be the accounting officer of the FSCS manager and remove HM Treasury’s power to require information from the FSCS manager respectively.
  2. Subsection (4) repeals section 15 of FSBRA 2013, which inserted section 218B of FSMA 2000.

Section 63: The Ombudsman scheme

  1. This section amends paragraph 15 of Schedule 17 to FSMA 2000.
  2. Subsection (2) inserts a new subsection 2B(d) to section 429 FSMA which applies the affirmative procedure to any provision made under paragraph 15(3) of Schedule 17.
  3. Subsection (3) introduces amendments effected at paragraph 15 of Schedule 17 which are set out at subsections (4) and (5).
  4. Subsection 4 inserts "or other persons of a specified description" to sub-paragraph (1) after "respondent". Sub-paragraph (1) sets out to whom the FOS can charge fees.
  5. Subsection (5) inserts the following sub-paragraphs after sub-paragraph (2).
  6. Subparagraph (3) which explains that a reference to persons of a specified description is a reference to such descriptions as may be specified in regulations made by HM Treasury.
  7. Subparagraph (4) which explains that the power to specify descriptions of persons at (3) may not be exercised so as to provide for eligible complainants to fall within those specified under Treasury regulations.
  8. Subparagraph (5) which defines "eligible complainants" as those who are eligible to bring complaints to the FOS in relation to the compulsory and voluntary jurisdiction of the ombudsman scheme under section 226(6) and 227(7) of FSMA 2000.
  9. Subparagraph (6) requires HM Treasury to consult the scheme operator, meaning the FOS, before making regulations under sub-paragraph (3).

Section 64: Unauthorised co-ownership AIFs

  1. This section amends FSMA 2000 to establish a delegated power for HM Treasury and to clarify that section 261E of FSMA 2000 is relevant for the purposes of authorised contractual schemes with regards to section 261D(1)(a) of FSMA 2000.
  2. Subsection (1) is self-explanatory.
  3. Subsection (2)(a) (inserting section 261E(A1) of FSMA 2000) clarifies that section 261E is relevant for the purposes of section 261D(1)(a) of FSMA 2000.
  4. Subsection (2)(b) is self-explanatory.
  5. Subsection (3) inserts the new Chapter 3B – Unauthorised co-ownership AIFs, along with the new section 261Z6 of FSMA 2000.
  6. Subsection (3) (inserting section 261Z6(1) of FSMA 2000) delegates a power to HM Treasury to apply the effect, as relevant, of sections 261M to 261O and section 261P(1) and (2) of FSMA 2000, to unauthorised co-ownership AIFs.
  7. Subsection (3) (inserting section 261Z6(2) of FSMA 2000) makes clear that the delegated power allows for provision about unauthorised contractual AIFs in general, or those of a specified description.
  8. Subsection (3) (inserting section 261Z6(3) of FSMA 2000) sets out the definition of an unauthorised co-ownership AIF, for the purposes of this section.

Section 65: Power to amend enactments in consequence of rules

  1. This section inserts new section 141B into FSMA 2000.
  2. Within this, subsection (1) of new section 141B enables HM Treasury to amend legislation as a consequence of rules made by a regulator.
  3. Subsection 141B(2) is self-explanatory.
  4. Subsection (3) omits section 144F of FSMA 2000, which enables HM Treasury to amend an enactment as a consequence of CRR rules made by the PRA. New section 141B will enable HM Treasury to amend enactments as a consequence of CRR rules, in addition to other regulator rules, and so section 144F is no longer required.
  5. Subsection (4)(a) inserts new section 141B into section 429(4) of FSMA 2000 which provides that regulations made under this power are subject to the affirmative Parliamentary procedure. And as 144F has been repealed, subsection (4)(b) provides for the deletion of section 144F from Section 429(4) of FSMA 2000.

Section 66: Ambulatory references

  1. This section enables the PRA, the FCA, and HM Treasury to make "ambulatory" references to domestic legislation and regulator rules respectively. This means that such references would not need to be updated if the rules or legislation they refer to change over time.
  2. Subsection (2) amends section 137T of FSMA 2000. When the PRA and the FCA make rules, this section enables them to make provisions that a reference to legislation is ambulatory. This means that it would refer to the current version of the legislation rather than the legislation at the point at which the rule is made.
  3. Subsection (3) fulfils a similar function for regulations made under FSMA 2000. This means that where HM Treasury makes secondary legislation, that legislation can refer to the current version of the rules, rather than the rules at the point at which the legislation is made. Subsection 3(b) clarifies that this includes rules made by the Bank of England.

Section 67: Power to amend or repeal certain provisions of FSMA 2000

  1. This section enables HM Treasury to amend or repeal the parts of 9C and 9D of FSMA 2000 which established the requirements for the FCA to make certain rules in relation to investment firms, and for the PRA and the FCA to have regard to certain matters. This is required as HM Treasury could exercise the powers in sections 30 and 31 in a way that would require these Parts of FSMA 2000 to be repealed or amended in order to remain effective.
  2. Subsection (1) provides a power for HM Treasury to amend or repeal provisions the relevant parts of Parts 9C and 9D of FMSA 2000. Subsection (2) enables HM Treasury to make consequential changes to the rest of these Parts of FSMA 2000 as a result of exercising this power.
  3. Subsection (3) is self-explanatory.

Section 68: Power under FSMA 2000 to make transitional provisions

  1. This section amends section 427 of FSMA 2000, which makes provision about transitional arrangements that can be provided for by the government in relation to FSMA 2000. These amendments update references to "the Authority" (which referred to the Financial Services Authority) to refer to the FCA and the PRA.
  2. Subsection (3) inserts paragraph 31B into Schedule 17A to FSMA 2000, which ensures that references to "a regulator" in section 427 of FSMA 2000 are read as including the Bank of England.

Section 69: Cryptoassets

  1. This section amends FSMA 2000 to clarify that HM Treasury can use its existing powers in sections 21 and 22 of FSMA 2000 to regulate cryptoassets.
  2. Subsection (2) amends the definition of "investment" contained in section 21(14) of FSMA 2000. The existing definition is ‘"investment" includes any asset, right or interest.’ This amendment ensures that this includes where an asset, right or interest is, or comprises or represents, a cryptoasset.
  3. Subsection (3) amends the definition of "investment" contained in section 22(4) of FSMA 2000. The existing definition is ‘"investment" includes any asset, right or interest.’ This amendment ensures that this includes where an asset, right or interest is, or comprises or represents, a cryptoasset.
  4. Subsection (4)(a) inserts a new definition of "cryptoasset" to section 417 of FSMA 2000, to apply across FSMA 2000. This defines cryptoassets as any cryptographically secured digital representation of value or contractual rights that can be transferred, stored or traded electronically, and that uses technology supporting the recording or storage of data (which may include distributed ledger technology).
  5. Subsection (4)(b) gives HM Treasury the power to amend by regulation the definition of cryptoassets in subsection (4)(a) above.
  6. Subsection (5) amends section 429(2) of FSMA 2000 to include the new amendment power in subsection (4)(b) above. As a result, any regulation made by HM Treasury pursuant to the power in subsection (4)(b) above is subject to the affirmative parliamentary procedure.

Bank of England levy

Section 70: Bank of England levy

  1. This section amends the Bank of England Act 1998 to repeal the Cash Ratio Deposit (CRD) scheme and to introduce new provisions for the Bank to impose a charge on financial institutions in connection with the pursuit of its financial stability and monetary policy objectives.
  2. Subsection (2) omits section 6 (Cash ratio deposits) of, and Schedule 2 to, the Bank of England Act 1998. Together these omissions repeal the CRD scheme. Subsections (3) and (4) insert the new section 6A and Schedule 2ZA into the Bank of England Act 1998, establishing the Bank of England levy, which will replace it.
  3. Paragraph 1 of Schedule 2ZA will give a new power to the Bank to impose a charge on eligible institutions, known as the Bank of England levy. The remainder of the Schedule makes provision for how this power may be exercised.
  4. The charge may be levied on ‘eligible institutions’, which is defined by paragraph 2 broadly as UK deposit-taking institutions (banks and building societies) authorised under FSMA 2000. HM Treasury will have the power to amend this definition by regulations.
  5. Paragraph 4 requires the Bank to: 1) determine which of its policy functions it intends to fund (in whole or in part) using the levy; and, 2) determine the amount it reasonably considers it requires in connection with the funding of those functions, for each levy year (which is defined as a period of 12 months in paragraph 3). Here the Bank’s policy functions refers to functions exercised by the Bank in pursuit of its monetary policy and financial stability objectives. The Bank will also be required to publish these determinations.
  6. Paragraph 5 provides that the amount of the levy that an individual eligible institution is liable to pay must be determined by the Bank in accordance with regulations made by HM Treasury. These regulations will set out how the levy is to be calculated and it is intended that they will be reviewed at least every five years. The provision also gives HM Treasury the power to confer discretion on the Bank to determine certain specified matters. Paragraph 6 sets out the process by which the Bank will notify individual eligible institutions of the amount of levy they must pay each levy year.
  7. Paragraphs 7 and 8 set out what will happen if a levy is not paid and how the Bank may seek to recover unpaid amounts.
  8. Paragraph 9 gives the Bank powers to request information which it needs in order to operate the levy scheme.
  9. Paragraph 10 sets out the provisions concerning the making of secondary legislation. In making regulations under Schedule 2ZA, HM Treasury must consult the Bank and any others who appear to HM Treasury to represent those likely to be affected by the regulations. It must also have regard to the financial needs of the Bank. The provision also sets out the parliamentary procedure required for exercising the regulation making powers.

Section 71: Bank of England levy: consequential amendments

  1. This section makes a number of consequential amendments to the Bank of England Act 1998 which are needed as a result of the amendments in section 70.

Other miscellaneous provisions

Section 72: Liability of payment service providers for fraudulent transactions

  1. Subsections (1), (2), (3)(a) and (4) of this section set out that the Payment Systems Regulator must prepare and publish a draft relevant requirement; describe the nature of that requirement; how the Payment Systems Regulator should consult, and the timescales within which it must do so. The effect of this section is to place a standalone duty on the PSR that it must prepare and publish a draft of a relevant requirement for reimbursement in such "qualifying cases" of payment orders as the Regulator considers should be eligible for reimbursement (subsections (1) and (3)(a)). Such qualifying cases are where "the case relates to a payment order executed over the Faster Payments Scheme" and "the payment order was executed subsequent to fraud or dishonesty" (subsection (2)). This would cover APP scams. Such a requirement must be published within 2 months of the provision being commenced (subsection (4)).
  2. Subsections (5) to (7) require the Payment Systems Regulator to subsequently impose such a requirement, having regard for any representations received as part of the consultation, and the timescales within which it must do so. The PSR must consult on the published requirement and then give effect to it subject to any consultation responses (subsections (3)(b), (5) and (6)). This process must be completed within 6 months of the provision being commenced. The provision does not amend the FSBRA 2013 framework, but requires the PSR to take a set of specified actions within that framework.
  3. Subsection 8 makes clear that publication and consultation requirements in subsections (1) and (3) as well as under section 104(2) of the Financial Services (Banking Reform) Act 2013 in the application of that section to a relevant requirement can be satisfied by action taken before the coming into force of this provision.
  4. Subsection (9) clarifies that the Payment Systems Regulator is able to subsequently vary (that is, amend) or revoke any requirement made under this section, and to impose further requirements relating to the reimbursement of fraudulent payments.
  5. Subsection 10 defines specific terms used in subsections (1) to (9).
  6. Subsection 11 amends regulation 90 of the Payment Services Regulations 2017, such that it does not affect the liability of a payment service provider under a relevant requirement in a case where the payment order is executed subsequent to fraud or dishonesty. Relevant requirements include the provisions in FSBRA 2013 and regulation 125 of the Payment Services Regulations 2017 that may be used by the PSR in relation to APP scams.

Section 73: Credit unions

  1. This section inserts Schedule 14, which amends the Credit Unions Act 1979.

Section 74: Reinsurance for acts of terrorism

  1. This section inserts new sections 2A and 2B into the Reinsurance (Acts of Terrorism) Act 1993 (the 1993 Act) after section 2.
  2. Section 2A gives HM Treasury the power to issue directions to any public sector body, as classified by the Office for National Statistics (ONS), which benefits from an arrangement under the Act.
  3. Section 2A(1) is self-explanatory.
  4. Subsection (2) defines the category of "relevant persons" who may be subject to directions made by HM Treasury under these powers. A "relevant person" is defined in subsection (2)(a) as a person who has (i) entered into arrangements with HM Treasury under the 1993 Act (whether before or after the passing of the 1993 Act), such as an unlimited guarantee, and (ii) who has also been classified to the public sector by the ONS (whether before or after the passing of the 1993 Act). Subsection (2)(b) also includes in the definition any group undertaking of a person falling within subsection (2)(a).
  5. Subsection (3) gives HM Treasury the power to direct a "relevant person" to appoint an accounting officer.
  6. Subsection (4) allows HM Treasury to issue directions if it considers it necessary for the purpose of ensuring compliance with any requirements associated with the public sector classification of a person falling within subsection (2)(a). The following subsection (5) sets out certain matters to which such requirements may relate.
  7. Subsection (6) imposes a requirement on HM Treasury to consult with a "relevant person" before giving a direction to that person.
  8. Subsection (7) sets out the requirements for HM Treasury to issue a notice alongside any direction which includes the reasons for giving the direction and states when the direction takes effect.
  9. Subsections (8) to (12) are self-explanatory.
  10. Section 2B sets out how section 2A may be enforced by HM Treasury.

Section 75: Banking Act 2009: miscellaneous amendments

  1. This section makes minor technical amendments to the Banking Act 2009.
  2. Subsections (2) to (4) are explained in the legal background of these Notes.
  3. Subsection (5) amends the definition of "payment system" for the purposes of Part 5 of the Banking Act 2009 to clarify that it clearly includes firms before they have commenced operation.
  4. Subsection (6) provides that the Bank’s immunity from liability for damages in s.244 of the Banking Act 2009 applies to functions conferred under, or as a result of regulations made under, this Act.

Section 76: Arrangements for investigating complaints

  1. This section amends the Financial Services Act 2012.
  2. Subsections (2)(a) to (d) amend section 84 FSA 2012 to make HM Treasury, rather than the FCA, the PRA and the Bank, responsible for appointing an independent person, known as the "Complaints Commissioner". The Complaints Commissioner is responsible for the conduct of investigations under the complaints scheme established under Part 6 of the FSA 2012 for the resolution of complaints against the regulators.
  3. Subsection 2(e) requires that HM Treasury must appoint the Complaints Commissioner on terms and conditions reasonably designed by HM Treasury to ensure independence from the regulators, and to ensure that complaints will be investigated under the scheme without favouring the regulators.
  4. Subsection (3) makes amendments to section 87 FSA 2012, which sets out the requirements relating to the Complaints Commissioner’s annual report in subsections (9A) and (9B).
  5. Subsection (3)(a) inserts a new subsection (9A)(ba) to require the regulators, in their response to the Complaints Commissioner’s annual report, to provide a summary of the cases in which they decided not to follow "relevant recommendations" of the Complaints Commissioner and a summary of the reasons for not following those recommendations.
  6. Subsection (3)(b) inserts a new subsection (9B)(f) to enable HM Treasury to direct the Complaints Commissioner to include other matters (as may be specified in the direction) in its annual report.
  7. Subsection (3)(c) defines the term "relevant recommendations" used in the new subsection (9A)(ba) as comprising recommendations to the regulator contained in the Complaints Commissioner’s annual report, or in final reports given by the Complaints Commissioner in relation to individual complaints during the period to which the annual report relates.

Section 77: Politically exposed persons: money laundering and terrorist financing

  1. Section 77 sets out a requirement for HM Treasury to amend the MLRs such that "domestic PEPs" (PEPs entrusted with prominent public functions by the UK) and their family members or known close associates would be subject to a lesser level of enhanced due diligence, unless any other ‘enhanced risk factors’ are present. The requirement is also for the regulations to be laid in Parliament within twelve months of Royal Assent, and for HM Treasury lay a statement in Parliament within six months to update on its progress.

Section 78: Politically exposed persons: review of guidance

  1. Section 78 sets out a requirement for the FCA to review its guidance on PEPs within twelve months, to publish the conclusions of that review, and, if appropriate, to publish draft updated guidance for consultation. The FCA is also required to publish an update on its plan for the review within three months of Royal Assent

Section 79: Forest risk commodities: review

  1. This section obliges HM Treasury to carry out a review to assess the extent to which regulation of the UK financial system is adequate for the purpose of eliminating the financing of the use of prohibited forest risk commodities.
  2. Subsection (2) links the scope of the review to definitions in the Schedule 17 of the Environment Act 2021.
  3. Subsection (3) requires HM Treasury to publish and lay before Parliament a report that states the conclusions of the review, and the steps HM Treasury considers it appropriate to take to improve the effectiveness of the regulation of the UK financial system for the purpose of eliminating the financing of the use of prohibited forest risk commodities.
  4. Subsection (4) outlines that the review must be completed within 9 months of the first regulations being made by the Secretary of State under paragraph 1 of Schedule 17 to the Environment Act 2021.
  5. Subsection (5) contains relevant definitions.

Part 7: General

Section 80: Interpretation

  1. This section explains key terms for the purposes of this Act.

Section 81: Pre-commencement consultation

  1. Subsections (1) and (2) explain that any duty to consult that applies to or is connected with, or arises as a consequence of a provision modified or made by, the Act can be fulfilled if undertaken before the commencement date, as well as on or after. obligation to consult introduced by the Act. That includes, for example, the obligation for the FCA and the PRA to consult their cost-benefit analysis panels.
  2. Subsection (3) specifies duties to consult in other primary legislation to which subsection (1) applies.
  3. Subsection (4) defines the term "commencement date" for the purpose of this section.

Section 82: Financial provision

  1. This section is self-explanatory.

Section 83: Power to make consequential provision

  1. This section gives HM Treasury power to make regulations making provisions consequential on provisions of the Act. Regulations making consequential amendments are subject to the negative procedure, except where they amend primary legislation. In that case, the regulations are to be subject to the affirmative procedure.

Section 84: Regulations

  1. This section specifies that regulations made under this Act are exercisable by statutory instrument. Subsection (2)(a) enables HM Treasury to make regulations that include ambulatory references rules or other instruments.
  2. Subsections (3) and (4) defines the "affirmative" and "negative" scrutiny procedures that apply to the making of regulations under the Act.
  3. Subsections (5), (6) and (7) are self-explanatory.

Section 85: Extent

  1. This section sets out the territorial extent of the Act.

Section 86: Commencement

  1. This section sets out that the provisions of the Act, other than those listed in subsections (1) and (2), will commence on the day appointed by HM Treasury by regulations.
  2. Subsection (1) lists provisions which will commence on Royal Assent and subsection (2) lists provisions which will commence two months after Royal Assent.
  3. Subsections (3) to (7) are self-explanatory.

Section 87: Short title

  1. This section provides that the Act may be cited as the Financial Services and Markets Act 2023.

Schedule 1: EU financial services legislation

  1. Schedule 1 governs the retained EU law related to financial services which is revoked by section 1(1).

Part 1 – Retained direct principal EU legislation

  1. Part 1 of the Schedule captures retained direct principal EU legislation. This means EU Regulations which were made directly under the powers to make legislation granted to EU intuitions in the various Treaties which establish the EU. This list is not exhaustive, but it contains all the EU Regulations which are generally followed. It is possible that there are some EU Regulations which have been superseded which are not listed here.

Part 2 – Subordinate legislation made under primary legislation

  1. Part 2 of the Schedule captures subordinate legislation made under primary legislation. That means domestic secondary legislation which was made either entirely or in part, for the purposes of implementing EU Directives or other obligations, or for related purposes.
  2. This list is broadly composed of three types of SI:
    1. SIs made under section 2(2) of the European Communities Act (ECA) 1972. These SIs were generally made under the ECA in order to implement EU obligations when the UK was part of the EU. It was common for EU Directives to be implemented in this way, and many EU Regulations also required use of the powers in the ECA in order to be properly incorporated into UK law.
    2. SIs made partly under the ECA. While some SIs in this Schedule may look as if they are made under entirely domestic legislation according to their titles, such as FSMA 2000, HM Treasury has included them in this list as they exercised the powers in the ECA in addition to domestic powers.
    3. SIs made under EUWA 2018. These SIs were made in order to address deficiencies in retained EU law when the UK left the EU. While these SIs do not directly implement EU obligations, they will no longer function effectively when retained EU law is revoked, and they are included in this Schedule. There is also one SI made under the EU (Withdrawal) Agreement Act 2020, which is included for the same reason.

Part 3 – EU tertiary legislation

  1. Part 3 of the Schedule captures EU tertiary legislation. This means instruments which are made under other EU instruments, rather than under EU Treaties. Examples include Delegated Regulations, Implementing Acts, and EU Decisions. Rather than list this category directly in the Schedule, the Schedule captures tertiary legislation under:
    1. EU Regulations related to financial services as captured by Part 1 of the Schedule; and
    2. EU Directives related to financial services, which are listed in the Schedule itself. While EU Directives no longer apply to the UK, they sometimes created powers for the EU commission to create EU tertiary legislation which does continue to apply.
    3. Any legislation made under the secondary legislation in Part 2 of the Schedule, as these SIs will be revoked;
    4. Any Technical Standards made under Chapter 2A of Part 9A of FSMA 2000, which will also be revoked.

Part 4 – Primary legislation

  1. Part 4 of the Schedule contains primary legislation. This includes repealing Part 9D of FSMA 2000, which relates to rules which are defined in relation to the EU Capital Requirements Regulation; and Chapter 2A of Part 9B of FSMA 2000, which governs Technical Standards, which are a form of EU tertiary legislation for which responsibility has already been transferred to the Regulators, and so when they are repealed this Chapter of FSMA 2000 will no longer be needed.

Part 5 – Other retained EU law

  1. Part 5 acts as a "sweep up" provision by revoking all EU-derived legislation relating to financial services which is not directly listed in the Schedule (except primary legislation). While the government has attempted to identify all relevant retained EU law in financial services, this has not always been possible. This is due to the length of time that the UK was in the EU, the fact that many EU laws have been updated frequently or superseded over time, and finally because some EU obligations were implemented entirely through domestic instruments. This approach is also necessary to capture instruments which will be made during the transitional period before retained EU law is revoked.
  2. Therefore Part 5 revokes all EU-derived legislation in financial services which is not listed or otherwise captured by Parts 1, 2, and 3 of the Schedule.
  3. This part is governed by the definition of EU-derived legislation and how this can be determined to "relate" to financial services, which is also set out in Part 5 of the Schedule. Essentially, this means that section 1(1) of the Act revokes all the legislation which is listed directly in the Schedule, but also any unlisted EU-derived legislation related to financial services.
  4. As a result, Part 5 revokes:
    1. Any unlisted EU regulations relating to financial services;
    2. Any unlisted EU tertiary legislation relating to financial services;
    3. Any unlisted UK secondary legislation which implemented an EU Directive or other obligation related to financial services.
    4. Secondary legislation made under section 3 of this Act, which gives HM Treasury a power to amend retained EU law;
    5. Any unlisted or not yet made SIs made under EUWA 2018 relating to financial services.
  5. The revocation of unlisted EU-derived legislation does not capture any domestic primary legislation.
  6. In order to ensure that Part 5 does not revoke important provisions which may, in part, implement EU obligations, and to avoid unintended consequences, section 1(6) provides HM Treasury with a power to exclude subordinate legislation from this "sweep up" provision, meaning that they would not be revoked by section 1(1) of the Act. The Regulated Activities Order is an example of an instrument which HM Treasury may wish to exclude from Part 5 of the Schedule in such as way, as it is an important part of the functioning of the domestic FSMA 2000 framework, and there are already sufficient existing powers to update it. Section 1(6) is therefore included in order to avoid the unnecessary complexity of revoking and restating such instruments, and any others.

Schedule 2: Transitional amendments

Part 1 – Amendments to the Markets in Financial Instruments Regulation

Paragraph 2: Transparency requirements for equities and equity-like instruments

  1. This paragraph of the Schedule amends Article 3 of the Markets in Financial Instruments Regulation (MiFIR), which sets out what information trading venues need to make public in respect of trading interests in certain equity and equity-like instruments. It transfers to Article 3 a power, previously contained in Article 4 of MiFIR, for the FCA to make RTS to specify the detail of pre-trade transparency requirements and their calibration for different types of trading system. It specifies that when developing the RTS the FCA must take into account the different types of trading systems that may be used by trading venues.

Paragraph 3: Waivers for equity and equity-like instruments

  1. This paragraph of the Schedule substitutes Article 4 MiFIR to allow the FCA to make rules to provide for the waiver of the pre-trade transparency requirements that are set out in Article 3 of MiFIR. For context, Article 3(1) MiFIR requires market operators and investment firms operating a trading venue to make public certain information about a trade in equity and equity-like instruments on a continuous basis, that is, before shares, depositary receipts, exchange traded funds, certificates and other similar financial instruments are traded on a trading venue.
  2. Paragraph 2 of the new Article 4 limits the FCA’s ability to waive pre-trade transparency requirements for equity and equity-like instruments traded on a venue to circumstances where the FCA considers that doing so is necessary or expedient to advance one or more of its operational objectives. These objectives are set out in FSMA 2000 (see section 1B(3)).
  3. Paragraph 3 enables the FCA to apply conditions on market operators and investment firms operating trading venues when they are using a waiver.
  4. Paragraph 4 requires the FCA to monitor the impact of any rules it makes when using this power.
  5. Paragraph 5 gives the FCA the power to withdraw the use of waivers for specific market operators and investment firms operating a trading venue if it believes that a trading venue is mis-using a waiver (for example, if it is using them to avoid requirements imposed by the rules).

Paragraph 4: Suspension of waivers

  1. Paragraph 4 introduces a new Article 4a into MiFIR to give the FCA the power to suspend, or partially suspend the use of a waiver if it considers that price formation is being unduly harmed by its use.
  2. Paragraph 2 of Article 4a specifies that the FCA can only suspend a waiver using the power outlined in paragraph 1 for six months at a time but can renew the suspension for further periods of up to six months if it considers that reinstating the waiver would unduly harm price formation.
  3. Paragraph 3 limits the FCA’s ability to suspend a waiver using the powers outlined in paragraph 1 to instances where the FCA considers that the intervention is necessary to advance the FCA’s integrity objective under section 1D of FSMA 2000.
  4. Paragraph 4 prescribes the factors to which the FCA must have regard when considering the suspension or renewal of a suspension of a waiver.
  5. Paragraph 5 requires that the FCA consult HM Treasury before directing that a waiver is suspended.
  6. Paragraph 6 exempts the FCA from that consultation requirement if the FCA considers that it is under time pressure and urgent action is needed to protect the price formation process or the interests of consumers.

Paragraph 5: Double Volume Cap

  1. This paragraph of the Schedule removes the double volume cap (DVC), which was a mechanism that was introduced to limit the amount of trading that could happen using the ‘reference price waiver’ and ‘negotiated trade waiver’ (waivers provided by the Article 4 MiFIR prior to its substitution by paragraph 3).

Paragraph 6: Amendment to the obligation for systematic internalisers to make public firm quotes

  1. This paragraph of the Schedule makes consequential amendments to Article 14 of MiFIR (which concerns the obligation for systematic internalisers to make public firm quotes on equity and equity-like instruments) to remove references to Article 5 MiFIR (Article 5 MiFIR contains the DVC, which is being removed by paragraph 5 of the Schedule).
  2. This paragraph also introduces a provision describing the transitional period referenced in Article 14. This replaces an equivalent provision previously contained in Article 5 MiFIR.

Paragraph 7: Transparency requirements for fixed income instruments and derivatives etc

  1. This paragraph of the Schedule substitutes Articles 8 to 11 (Pre-trade transparency requirements for trading venues in respect of bonds, structured finance products, emission allowances and derivatives; Waivers for non-equity instruments; Post-trade transparency requirements for trading venues in respect of bonds, structured finance products, emission allowances and derivatives; and, Authorisation of deferred publication) of MiFIR.
  2. Paragraph 1 of new Article 8 requires the FCA to make rules imposing pre-trade transparency requirements on trading venues where the FCA determines that relevant non-equity instruments should attract such requirements. The purpose of imposing requirements must be to aid price formation and to allow for the fair evaluation of financial assets.
  3. Paragraph 2 of Article 8 limits the rule-making power outlined in paragraph (1) to circumstances where the FCA considers its use is necessary or expedient for advancing at least one of the FCA’s operational objectives as set out in section 1B(3) of FSMA 2000.
  4. Paragraph 3 of Article 8 also requires the FCA to consider the impact on market liquidity when setting pre-trade transparency requirements for fixed income and derivatives trading using the power outlined in paragraph 1. This is to avoid the efficient functioning of markets being negatively impacted through reduced liquidity.
  5. Paragraph 4 of Article 8 provides examples of the sorts of requirements the FCA could impose using this power.
  6. Paragraph 5 of Article 8 clarifies that when making rules using the power in paragraph 1 the FCA can set different requirements for different types of trading systems and instruments. For example, the FCA could limit pre-trade transparency requirements to systems that already operate based on broad transparency, such as order books in respect of derivative transactions.
  7. Paragraph 6 of Article 8 makes provision about the instruments and persons that are in scope of this power.
  8. Paragraph 1 of new Article 9 gives the FCA the power to include provision for waivers in respect of the pre-trade transparency requirements it imposes through rule-making power in Article 8.
  9. Paragraph 2 of Article 9 gives the FCA the power to decide what, if any, conditions should be applied to any waiver.
  10. Paragraph 3 of Article 9 gives the FCA the ability to withdraw a waiver from a relevant person if they are using it in a way that deviates from its original purpose or to avoid complying with regulation. The FCA must give the relevant person a notice to withdraw the waiver.
  11. Paragraph 4 of Article 9 gives the FCA the power to suspend requirements in pre-trade transparency rules for an instrument or class of instruments. The power is exercisable by notice.
  12. Paragraph 5 of Article 9 obliges the FCA to include specific information in such notices and imposes requirements about the manner of their publication.
  13. Paragraph 6 of Article 9 limits the FCA’s power to suspend pre-trade requirements to instances where it considers that it is necessary to do so to advance its integrity objective, as set out in section 1D of FSMA 2000.
  14. Paragraph 7 of Article 9 specifies that when suspending pre-trade transparency requirements, the FCA should also have regard to its consumer protection objective and competition objective, as set out in sections 1C and 1E of FSMA 2000 respectively.
  15. Paragraph 1 of new Article 10 requires the FCA to make rules imposing post-trade transparency requirements on trading venues where the FCA determines that relevant non-equity instruments should attract such requirements. The purpose of imposing requirements must be to aid price formation and to allow for the fair evaluation of financial assets.
  16. Paragraph 2 of Article 10 limits the rule-making power for post-trade transparency, outlined in paragraph (1) to circumstances where the FCA considers its use is necessary or expedient for advancing at least one of the FCA’s operational objectives as set out in section 1B(3) of FSMA 2000.
  17. Paragraph 3 of Article 10 requires the FCA to consider the impact on market liquidity, when setting post-trade requirements using the power outlined in paragraph 1. This is to avoid the efficient functioning of markets being negatively impacted through reduced liquidity.
  18. Paragraph 4 of Article 10 provides examples of the sorts of requirements the FCA could impose using this power.
  19. Paragraph 5 of Article 10 clarifies that when making post-trade transparency requirements using the rule-making power in paragraph 1 the FCA can set different requirements for different types of trading systems and instruments.
  20. Paragraph 6 of Article 10 makes provision about the instruments and persons that are in scope of this power.
  21. Paragraph 1 of new Article 11 gives the FCA the power to include provision for deferrals in respect of post-trade transparency requirements it imposes through the rule-making power in Article 10.
  22. Paragraph 2 of Article 11 gives the FCA the power to suspend requirements in post-trade transparency rules for an instrument or class of instruments. The power is exercisable by notice.
  23. Paragraph 3 of Article 11 obliges the FCA to include certain things in such notices and imposes requirements about the manner of their publication.
  24. Paragraph 4 of Article 11 limits the FCA’s power to suspend post-trade requirements to instances where it considers that it is necessary to do so to advance its integrity objective, as set out in section 1D of FSMA 2000.
  25. Paragraph 5 of Article 11 specifies that when suspending post-trade transparency requirements, the FCA should also have regard to its consumer protection objective and competition objective, as set out in sections 1C and 1E of FSMA 2000 respectively.

Paragraph 8: Systematic Internalisers (definition)

  1. This paragraph of the Schedule amends the definition of a systematic internaliser in Article 2(1) MiFIR.
  2. It retains the current high-level component of the definition of a systematic internaliser in MiFIR (an investment firm which, on an organised, frequent, systematic and substantial basis, deals on own account when executing client orders outside of a UK regulated market, a UK multilateral trading facility (MTF) or a UK organised trading facility (OTF)), and the ability for investment firms to opt in to be a systematic internaliser. It removes the need for investment firms to undertake complex calculations to determine if they are operating on an organised, frequent, systematic and substantial basis and instead gives the FCA the power to make rules to determine the meaning of organised, frequent, systematic and substantial. This determination can be entirely qualitative, if the FCA sees fit.

Paragraph 9: Systematic Internalisers (midpoint crossing)

  1. This paragraph of the Schedule removes the reference to ‘large in scale’ in Article 17a of MiFIR, which currently restricts systematic internalisers from crossing at the midpoint within the best bid and offer to trades that are ‘large in scale’. Removing the reference to ‘large in scale’ will allow systematic internalisers to execute client orders at the midpoint within the best bid and offer for all trades.

Paragraphs 10 to 12: Systematic internalisers (pre-trade transparency requirements for fixed income instruments and derivatives etc)

  1. Paragraphs 10 and 11 of the Schedule substitute Articles 18 and 21 (Obligation for systematic internalisers to make public firm quotes in respect of bonds, structured finance products, emission allowances and derivatives; Post-trade disclosure by investment firms, including systematic internalisers, in respect of bonds, structured finance products, emission allowances and derivatives) of MiFIR, and introduce two new articles. Further to this, paragraph 12 of the Schedule makes a consequential amendment to Article 22.
  2. Paragraph 1 of new Article 18 gives the FCA a power to make rules imposing pre-trade transparency requirements on systematic internalisers where the FCA determines relevant non-equity instruments should attract such requirements. The purpose of imposing requirements must be to aid price formation and allow for the fair evaluation of financial assets.
  3. Paragraph 2 of Article 18 limits this rule-making power to circumstances where the FCA considers its use is necessary or expedient for advancing at least one of the FCA’s operational objectives as set out in section 1B(3) of FSMA 2000.
  4. Paragraph 3 of Article 18 requires the FCA to consider the impact on market liquidity when using the power to set pre-trade transparency requirements on systematic internalisers. This is to avoid the efficient functioning of markets being negatively impacted through reduced liquidity.
  5. Paragraph 4 of Article 18 provides examples of the sorts of requirements the FCA could impose using this power.
  6. Paragraph 5 of Article 18 provides that when making rules to set pre-trade transparency requirements for systematic internalisers, the FCA can set provisions for quotes issued by systematic internalisers to be updated or withdrawn.
  7. Paragraph 6 of Article 18 makes provision about the instruments that are in scope of this power.
  8. Paragraph 1 of Article 18a gives the FCA the power to make provision for waivers of any of the pre-trade transparency requirements it imposes using the rule-making power in Article 18.
  9. Paragraph 2 of Article 18a gives the FCA the power to decide what, if any, conditions should be applied to any waiver.
  10. Paragraph 3 of Article 18a gives the FCA the ability to withdraw a waiver from a systematic internaliser if the systematic internaliser is using it in a way that deviates from its original purpose or to avoid complying with regulation. The FCA must give the relevant systematic internaliser a notice to withdraw the waiver.
  11. Paragraph 4 of Article 18a gives the FCA the ability to suspend pre-trade transparency requirements for an instrument or class of instruments. The power is exercisable by notice.
  12. Paragraph 5 of Article 18a obliges the FCA to include certain things in such notices and also imposes requirements about the manner of their publication.
  13. Paragraph 6 of Article 18a limits the FCA’s power to suspend pre-trade transparency requirements to instances where it considers that it is necessary to do so to advance its integrity objective, as set out in section 1D of FSMA 2000.
  14. Paragraph 7 of Article 18a specifies that when suspending pre-trade transparency requirements, the FCA should also have regard to its consumer protection objective and competition objective, as set out in sections 1C and 1E of FSMA 2000 respectively.
  15. Article 18b is inserted to complement the amendment to the ‘systematic internaliser’ definition in paragraph 8 of the Schedule. It requires investment firms who meet the definition of ‘systematic internaliser’ to notify the FCA, and the FCA to keep a list of all systematic internalisers for which it has received notification.
  16. Paragraph 1 of new Article 21 requires the FCA to make rules imposing post-trade transparency requirements on investment firms, including systematic internalisers, where the FCA determines that relevant non-equity instruments should attract such requirements. The purpose of imposing requirements must be to aid price formation and allow for the fair evaluation of financial assets.
  17. Paragraph 2 of Article 21 limits the rule-making power outlined in paragraph (1) to circumstances where its use is either necessary, or expedient, in advancing at least one of the FCA’s operational objectives as set out in section 1B(3) of FSMA 2000.
  18. Paragraph 3 of Article 21 requires the FCA to consider the impact on market liquidity when setting post-trade transparency requirements for investment firms, including systematic internalisers, using the power conferred by paragraph 1. This is to avoid the efficient functioning of markets being negatively impacted through reduced liquidity.
  19. Paragraph 4 of Article 21 provides examples of the sorts of requirements the FCA could impose in relation to transparency using this power.
  20. Paragraph 5 of Article 21 clarifies that when making rules about post-trade transparency requirements for investment firms, including systematic internalisers, using the powers in paragraph 1 the FCA can prescribe who should report a trade, when both parties to the trade are subject to post-trade transparency requirements.
  21. Paragraph 6 of Article 21 explains that the FCA can grant deferrals for investment firms, including systematic internalisers, who are subject to the post-trade transparency requirements that the FCA imposes through the rule-making power in paragraph 1.
  22. Paragraph 7 of Article 21 states that the FCA can impose any conditions it deems appropriate when granting a deferral.
  23. Paragraph 8 of Article 21 gives the FCA the ability to suspend any transparency requirement the FCA imposes using the rule-making power in paragraph 1 for an instrument or class of instruments. The power is exercisable by notice.
  24. Paragraph 9 of Article 21 obliges the FCA to include certain things in such notices and imposes requirements about the manner of their publication.
  25. Paragraph 10 of Article 21 limits the FCA’s power to suspend post-trade requirements for systematic internalisers and investment firms to instances where it considers that it is necessary to do so to advance its integrity objective, as set out in section 1D of FSMA 2000.
  26. Paragraph 11 of Article 21 provides that when suspending post-trade transparency requirements for investment firms, including systematic internalisers, the FCA must also have regard to its consumer protection objective and competition objective, as set out in sections 1C and 1E of FSMA 2000 respectively.
  27. Paragraph 12 of Article 21 makes provision about the instruments and persons that are in scope of the FCA’s rule-making power.

Paragraphs 13 and 14: Share Trading Obligation

  1. Paragraph 13 of the Schedule amends Article 23 MiFIR. Subparagraph (2) of this paragraph removes the requirement (known as the Share Trading Obligation or STO) for investment firms to ensure that the trades they undertake in shares admitted to trading on a venue take place on a UK regulated market, UK MTF, UK systematic internaliser, or an overseas trading venue assessed as equivalent.
  2. Subparagraph (3) changes the title of Article 23 MiFIR to reflect the removal of the STO. The only remaining requirement in Article 23 is the requirement for investment firms that operate an internal matching system which executes client orders in shares, depositary receipts, ETFs, certificates and other similar financial instruments on a multilateral basis to ensure that they have permission to operate as an MTF.
  3. Paragraph 14 of the Schedule removes a reference to Article 23 in Article 1 of MiFIR which is no longer needed as a result of the removal of the STO.

Paragraphs 15 and 16: Realigning the scope of the derivatives trading obligation

  1. Paragraphs 15 and 16 of the Schedule alter the scope of the type of counterparties that are subject to the derivatives trading obligation (DTO), set out at Article 28 of MiFIR, in order to align it with the scope of counterparties subject to the Clearing Obligation (CO), which is contained in EMIR.
  2. Paragraph 15 amends Article 1(3) MiFIR to bring the overall application of the relevant Part of MiFIR, as regards financial counterparties and non-financial counterparties, into line with those expressed to be within scope of the DTO further to the changes made to Article 28 by paragraph 16, as described below.
  3. Paragraph 16 of the Schedule amends Article 28 MiFIR to specify that the financial and non-financial counterparties in scope of the DTO are those subject to the CO in EMIR.
  4. To ensure consistency with the CO, paragraph 16 also stipulates that intragroup transactions and transactions that are covered by temporary exemptions from the CO (which apply to transactions that reduce investment risks directly relating to the financial solvency of pension scheme arrangements) are out of scope of the DTO.

Paragraph 17: Suspension or modification of the DTO

  1. Paragraph 17 of the Schedule introduces a new Article 28a into MiFIR. Paragraph 1 of Article 28a MiFIR gives the FCA the power to suspend or modify the DTO if the FCA considers it necessary to prevent or mitigate disruption to financial markets and advances one or more of the FCA’s operational objectives.
  2. Paragraph 2 outlines specific ways in which the DTO may be suspended or modified. It specifies that changes can be made in respect of either the persons, derivatives, or classes of derivatives to which the obligation applies, or to the trading venues on which the transactions must be concluded. It also gives the FCA the ability to make the suspension conditional on any criteria, as it deems appropriate.
  3. Paragraph 3 requires the FCA to have regard to its new competitiveness and growth objective in section 1EB of FSMA 2000 when using the power.
  4. Paragraph 4 explains that the FCA must consult with the Bank of England and the PRA if the suspension or modification could have an impact within the PRA’s remit (for example, if the change would apply to a person which is authorised by the PRA or if it would impact the discharge of the PRA’s functions).
  5. Paragraph 5 specifies that the FCA must obtain consent from HM Treasury before issuing a direction. Once the FCA has submitted a proposed direction to HM Treasury, HM Treasury must provide a written response within four weeks (and HM Treasury are deemed to consent to the issuing of the direction if no response is provided within that period).
  6. Paragraph 6 outlines that when giving a direction to modify the DTO, the FCA must also prepare a statement which explains the rationale behind issuing the direction, and any relevant guidance.
  7. Paragraph 7 requires the FCA to publish this direction and statement, and paragraph 8 requires HM Treasury to lay a copy of the direction and the statement before Parliament.
  8. Paragraph 9 outlines that if the FCA wish for a direction to have effect for longer than 6 months, it must publish a statement explaining why the criteria for the use of the direction are still being fulfilled. This statement is to be published as soon as reasonably practicable after each 6-month period (which starts on the day the direction is given).
  9. Paragraph 10 clarifies that the FCA may publish the statement in whatever way it thinks will best bring it to the attention of the public.
  10. Paragraph 11 clarifies that the FCA can vary a suspension or modification by issuing a new direction. Paragraph 12 specifies that the variation of a direction is not to be treated as the giving of a new direction in respect of the requirement to publish a statement after every 6-month period (as outlined above). It also explains that certain requirements applying to the issuing of an initial direction (such as the obligation to publish guidance in connection with the direction) do not apply to a direction which merely revokes a previous direction.
  11. Paragraph 13 stipulates that the issuance of an FCA direction to modify or suspend the DTO does not fall within scope of requirements in the Financial Services Act 2012 which concern the investigation of complaints against regulators in relation to the exercise of certain functions. Complaints relating to the exercise of this power of direction would not therefore need to be dealt with through the complaints scheme established under the relevant provisions of the 2012 Act.

Paragraph 18: DTO exemptions for risk reduction services

  1. Paragraph 18 of the Schedule substitutes Article 31 MiFIR. Paragraph 1 of the new Article 31 gives the FCA a rule-making power to disapply certain obligations in relation to either the transactions carried out as part of a risk reduction service, or persons meeting certain criteria who participate in the risk reduction services.
  2. Paragraph 2 limits the FCA’s use of this rule-making power to circumstances where the FCA considers its use is necessary or expedient for advancing at least one of the FCA’s operational objectives, as outlined in section 1B(3) FSMA 2000.
  3. Paragraph 3 establishes the criteria which risk reduction services must satisfy in order to be eligible for the exemption. Namely, to be capable of benefiting from the exemption, services must be post-trade services and must only produce trades which are non-price forming (i.e. that do not contribute to the price discovery process).
  4. Paragraph 4 specifies that when exercising this power, the FCA has the discretion to:
    1. Specify which risk reduction services are to be eligible for the exemptions with reference to any factors or criteria which it deems to be suitable (within the parameters of paragraph 3); and
    2. Impose any conditions on, or exceptions to, the use of the exemption that the FCA deems appropriate. It is through this provision that the FCA will be able to apply the conditions which were previously applied to the narrower exemption for portfolio compression, should it wish to.
  5. Paragraph 5 requires the FCA to consult with the Bank of England before using this power to make rules.
  6. Paragraph 6 specifies which requirements the FCA can exempt risk reduction services from under this rule-making power. These are:
    1. The best execution obligation, which obliges firms carrying out investment business to obtain the best possible deal for clients;
    2. A requirement in the FCA’s Market Conduct sourcebook relating to the operation of a multilateral system from an establishment in the United Kingdom.
    3. The DTO.

Paragraphs 19 to 27: Consequential amendments in MiFIR

  1. These paragraphs of the Schedule set out minor and consequential amendments to MiFIR further to the changes detailed above.

Part 2 – Amendments to the European Market Infrastructure Regulation

Paragraphs 28 to 30: CO exemptions for risk reduction services

  1. Paragraph 28 of the Schedule introduces the changes to EMIR made by paragraphs 29 and 30. 
  2. Paragraph 29 of the Schedule inserts Article 6b in EMIR.
  3. Paragraph 1 of Article 6b gives the Bank of England the power to disapply the clearing obligation, set out in Article 4 of EMIR, from transactions which stem from a post-trade risk reduction service. Post-trade risk reduction services consist of technical trades that reduce the risk of positions that market participants have entered into.
  4. Paragraph 2 limits the Bank’s use of this rule-making power to circumstances where the Bank considers its use is necessary or expedient for advancing the Bank’s key objective of financial stability under section 2A of the Bank of England Act 1998.
  5. Paragraph 3 establishes the criteria which risk reduction services must satisfy in order to be eligible for the exemption. Namely, it explains that the services must be post-trade, and must only produce trades which are non-price forming (i.e. which do not contribute to the price discovery process).
  6. Paragraph 4 specifies that when exercising this power, the Bank has the discretion to:
    1. Specify which risk reduction services are to be eligible for the exemptions with reference to any factors or criteria which it deems to be suitable (within the parameters of paragraph (3)); and
    2. Impose any conditions on, or exceptions to, the disapplication of the CO that the Bank deems appropriate.
  7. Paragraph 5 clarifies what counts as a risk reduction service for the purposes of this Article (i.e. that it must be a service provided by two or more counterparties for the purpose of reducing non-market risk in derivatives portfolios, such as portfolio compression).
  8. Paragraph 30 of the Schedule introduces Article 84c into EMIR, which provides how provisions of Part 9A of FSMA 2000 concerning rule-making will apply in relation to Article 6b. 

Part 3 – Amendments to the EU Securitisation Regulation 2017

Paragraphs 31 and 32: Amendments to the UK Securitisation Regulation

  1. Paragraph 31 sets out that the UK Securitisation Regulation will be amended by this Schedule.
  2. Paragraph 32 amends definitions in Article 2 of the UK Securitisation Regulation to add a definition of ‘STS equivalent non-UK securitisation’. It also revokes the definition of ‘third country’, because this term is being replaced with references to ‘country or territory outside of the United Kingdom’ throughout the Regulation.

Paragraph 33: Designation of countries or territories in relation to STS equivalent non-UK securitisations

  1. Paragraph 33 inserts new Article 28A into the UK Securitisation Regulation.
  2. Paragraph 1 of new Article 28A confers on HM Treasury a power to make regulations designating a country or territory in relation to specified descriptions of securitisations (‘STS equivalent non-UK securitisations.’)
  3. Paragraph 2 of new Article 28A allows HM Treasury to do so only if it is satisfied that the law and practice of the country or territory in relation to such securitisations has equivalent effect to the UK Securitisation Regulation and the 2018 Regulations as they relate to UK STS securitisations (‘applicable UK law’, as defined by paragraph 3).
  4. Paragraph 4 of new Article 28A says that, in making such regulations, HM Treasury must have regard to whether the FCA and, where relevant, the PRA, have established effective cooperation arrangements with the competent authorities of the country or territory being designated, as well as any other matter it considers relevant.
  5. Paragraph 5 sets out that HM Treasury may request a report in writing from the FCA on the law and practice of a country or territory in relation to specified securitisations. This can be requested when HM Treasury is considering whether to make, vary or revoke its designation of a country or territory.
  6. Paragraph 6 specifies what the FCA must do when HM Treasury requests such a report.
  7. Paragraph 7 sets out that the regulations made by HM Treasury may specify matters that must be considered by an institutional investor carrying out due diligence under Article 5(3) of the UK Securitisation Regulation, prior to holding a position in an STS equivalent non-UK securitisation.
  8. Paragraphs 8, 9 and 10 set out the requirements for regulations made by HM Treasury under new Article 28A.

Paragraphs 34 to 43: Minor and consequential amendments

  1. Paragraphs 34 to 43 make minor and consequential amendments including:
    1. Replacing reference to ‘third country’ with reference to ‘country or territory outside the United Kingdom’ in the UK Securitisation Regulation and the Securitisation Regulations 2018 (SI 2018/1288);
    2. Revoking the requirement for HM Treasury to review the UK Securitisation Regulation in relation to whether an equivalence regime should be introduced in the area of STS securitisations, because this review has been completed and new Article 28A inserts such a regime; and
    3. To ensure STS equivalent non-UK securitisations receive the same prudential treatment as UK STS securitisations in the CRR and Solvency II.

Part 4 – Amendments to the Financial Services and Markets Act 2000 (Markets in Financial Instruments) Regulations 2017

  1. Paragraph 44 of the Schedule introduces the changes to the Financial Services and Markets Act 2000 (Markets in Financial Instruments) Regulations 2017 made by paragraphs 45 to 50.

Paragraph 45: Position limits for commodity derivatives

  1. Paragraph 45 of the Schedule introduces regulation 15A to the Financial Services and Markets Act 2000 (Markets in Financial Instruments) Regulations 2017 (MiFI Regulations).
  2. Paragraph 1 of regulation 15A gives the FCA a rule-making power to require the operators of trading venues to set and enforce position limits and position management controls in respect of specific commodity derivative contracts, as well as classes of commodity derivatives. This will allow the FCA to establish a framework which will govern these regimes.
  3. Paragraph 2 of regulation 15A limits the ability of the FCA to exercise this rule-making power to instances where the FCA considers that doing so is necessary or expedient for advancing at least one of its operational objectives, as outlined in section 1B(3) of FSMA 2000.
  4. Paragraph 3 of regulation 15A explains that the FCA must have regard to its competitiveness and growth objective in section 1EB of FSMA 2000 when making rules under paragraph (1).
  5. Paragraph 4 of regulation 15A clarifies that the FCA can use its rule-making power to set out specific matters that trading venues need to consider when establishing position limits and management controls.
  6. Paragraph 5 of regulation 15A notes that the FCA can specify by rules certain circumstances when there will be exemptions from position limits and position management controls established under the framework set out in rules made under Paragraph 1.
  7. Paragraph 6 of regulation 15A clarifies the meaning of ‘position management controls’ which are covered by this rule-making power. It does so by giving a high-level, inexhaustive, list of arrangements which are encompassed by ‘position management controls’. This list includes monitoring the exposure of persons holding commodity derivative contracts, as well as requiring information from them about the size of the positions they have entered into.
  8. Paragraphs 7 through to 10 of regulation 15A outline the way in which various elements of the wider existing legislative framework apply to the rule-making power conferred by this regulation

Paragraph 46: FCA power to establish position limits

  1. Sub-paragraphs (2) and (3) of paragraph 46 to the Schedule amend regulation 16 to remove the obligation for the FCA to establish position limits on commodity derivative contracts traded on a trading venue and economically equivalent over-the-counter (OTC) contracts. As amended, regulation 16 gives the FCA the ability to set position limits on contracts that are in scope of the rules developed under regulation 15A (the FCA’s rule-making power over trading venues).
  2. Sub-paragraph (4) introduces changes to regulation 16 to limit the FCA’s ability to use this power to circumstances where the FCA considers that doing so is necessary to advance at least one of its operational objectives (as outlined in 1B(3) of FSMA 2000). Sub-paragraph 4 also provides that position limits which the FCA sets directly take precedence over position limits imposed by venues (even if this is as a result of the FCA requiring the venue to impose such limits through the use of its rule-making power). This effectively creates an emergency power through which the FCA can intervene in the market to impose position limits directly, in instances where the limits imposed by venues in accordance with the FCA’s broader framework are insufficient to uphold its objectives.
  3. Sub-paragraph 5 removes various requirements which are no longer necessary as a result of the FCA no longer being obliged to impose limits on commodity derivative contracts.

Paragraph 47: FCA power to require information on commodity derivatives

  1. Paragraph 47 updates the FCA’s power to require information regarding commodity derivatives contracts in order to take account of amendments introduced by paragraphs 45 and 46 of the Schedule.
  2. Sub-paragraphs (2) to (4) remove references to ‘over-the-counter’ contracts. They specify that the FCA can require information, notably, about contracts which belong to a class in respect of which the FCA is considering making rules and imposing requirements further to regulation 15A.

Paragraph 48: FCA power to intervene in setting position limits

  1. Paragraph 48 updates the FCA’s power to intervene in respect of position in commodity derivatives to account for the changes made to other parts of the position limits regime.
  2. To achieve this, sub-paragraph (2) updates the criteria under which the FCA can intervene directly, by limiting its use of this power to situations where the FCA considers intervention is necessary for advancing at least one of its operational objectives.
  3. Sub-paragraph (3) clarifies that the FCA may intervene and set restrictions on positions in commodity derivatives, even when doing so means imposing a more stringent requirement that those which are being imposed by trading venues in accordance with the FCA’s overarching framework governing the setting of position limits.
  4. Sub-paragraph (4) removes ‘economically equivalent over the counter contracts’ from the scope of the power.

Paragraphs 49: Interpretation

  1. Paragraph 49 to the Schedule makes updates to relevant definitions in regulation 29 of the MiFI Regulations. It:

    2. a. clarifies that the market operators which are subject to the FCA’s rule-making power in respect of position limits and position management controls are the same market operators as defined more generally in MiFIR;

    b. reiterates the meaning of "relevant person" provided by regulation 15A(10).

Paragraph 50: Consequential revocations

  1. This paragraph sets revocations of related legislation to be made in consequence of the changes to the MiFI Regulations described above.

Part 5 – Amendments to the Central Counterparties (Amendment, etc., and Transitional Provision) (EU Exit) Regulations 2018

Paragraph 51: Amendments relating to central counterparties

  1. Paragraph 51 extends the maximum period for which a non-UK CCP can be placed in the run-off regime to the Temporary Recognition Regime for overseas CCPs. It amends the Central Counterparties (Amendment, etc., and Transitional Provision) (EU Exit) Regulations 2018 (the "CCP Regulations").
  2. Sub-paragraph (2) amends regulation 19B(2) of the CCP Regulations to provide that the maximum duration of the ‘run-off' period for an overseas CCP is 3 years and 6 months, rather than one year.
  3. Sub-paragraph (3) inserts new paragraphs 4 to 8 into Regulation 19B of the CCP Regulations. New paragraph 4 clarifies that the Bank of England may make a new determination varying the length of the run-off period for a particular firm, in addition to any determination it has already made.
  4. New paragraphs 5 to 7 allow the Bank of England to extend the period for a CCP which leaves the run-off regime before these provisions come into force. They give the Bank of England the ability to determine that the CCP’s run-off period is to be treated as not having expired from the making of the determination onwards, and therefore to exercise its power to vary that CCP’s run-off period up to the maximum period of 3 years and 6 months.
  5. New paragraph 8 provides that new paragraphs 5 to 7 expire at the end of 31 December 2025 and clarifies that this expiry will not affect previous determinations made under these paragraphs.

Part 6 – Amendments relating to critical third parties

Paragraphs 52 to 72: Consequential amendments relating to critical third parties

  1. Because electronic money institutions (EMIs) as well as authorised payment institutions, small payment institutions and registered account information services providers can be designated as critical third parties (CTPs) and thus subject to the new Part of FSMA 2000, this Schedule makes consequential changes to the Electronic Money Regulations 2011 and the Payment Services Regulations 2017 to accommodate the new CTP regulatory regime.

Schedule 3: New Schedule 6B to FSMA 2000

  1. This Schedule is to be inserted as Schedule 6B into FSMA 2000. 
  2. This Schedule gives an illustrative and non-exhaustive list of examples of the types of activities which HM Treasury may designate using the powers conferred on it by new section 71K.

Schedule 4: FMI sandboxes

  1. Paragraphs 1 to 9 of the Schedule are intended to be illustrative as to the operational structure of an FMI sandbox and the powers that may be conferred by regulation on the regulators in its operation and oversight.

Paragraph 1 – Participation

  1. Sub-paragraph (1) to (4) outlines the type of eligibility criteria and procedure that may be applied for a particular iteration of an FMI Sandbox.
  2. Sub-paragraph (5) suggests that FMI participants notify other persons likely to engage either directly or indirectly in its FMI activities. For example, this would ensure that the market users of an FMI participant which is participating in an FMI sandbox, do not inadvertently end up participating in an FMI Sandbox without any warning or consent.

Paragraph 2 – Technology

  1. Testing the efficiency or effectiveness of technology is an example of how the FMI sandbox may be employed.

Paragraph 3 – Practices

  1. Testing the efficiency or effectiveness of new or different practices is an example of how the FMI sandbox may be employed.

Paragraph 4 – Financial Instruments

  1. An iteration of an FMI sandbox could specify the type of activity; the type and form of financial instruments; and any limitations imposed on an FMI participant as part of its participation in the FMI sandbox.

Paragraph 5 – Settlement of Payments

  1. An iteration of an FMI Sandbox could specify how transactions are to be settled and the form in which the settlement takes place.

Paragraph 6 – Requirements

  1. Sub-paragraph (1): The legislative framework of an FMI sandbox would allow the regulations to impose requirements on persons participating in an FMI sandbox and other persons engaged in connection with or otherwise not participating directly in an FMI sandbox.
  2. Sub-paragraph (2): The regulations could confer a power on the regulator to make its rules and technical standards applicable for the purposes of an FMI sandbox arrangement.

Paragraph 7 – Co-operation

  1. This paragraph is self-explanatory.

Paragraph 8 – Transparency and reporting

  1. Sub-paragraphs (1) to (3) are indicative of the reporting and accountability provisions that could be adopted to ensure that an appropriate level of information is provided for the duration of an FMI sandbox, particularly as it relates to the reporting obligation, as provided for in section 14.

Paragraph 9 – Enforcement

  1. Sub-paragraphs (1) to (3) are indicative of an enforcement regime that could be in place during the operation of an FMI sandbox. Provision could be made to allow regulators to draw on their existing enforcement powers and tailor them in accordance with a particular iteration of an FMI sandbox, to include, suspending or terminating a person’s participation within an FMI Sandbox and the imposition of civil penalties.

Schedule 5: Financial promotion: related amendments

  1. Paragraph 1 is self-explanatory.
  2. Paragraph 2 refers to section 1H of FSMA 2000. The amendment expands the definition of "regulated financial services" to now include services provided by authorised firms communicating, or approving communications by others, of "inducements" to engage in investment activity or claims management activity. Inclusion of the term "inducement" provides that the FCA’s operational objectives are applied to the full range of financial promotion activity and specifically as it relates to the new section 55NA(7) and (8)(b) of FSMA 2000.
  3. Paragraph 3 refers to section 25 of FSMA 2000. The change amends the reasonable grounds for a defence relating to a contravention of the general restriction on financial promotions under section 21 of FSMA 2000, to accommodate the new subsection 2A. This change means that in proceedings for an offence under section 25 of FSMA 2000, it is a defence for the accused to show that they believed on reasonable grounds that the communication had been approved by an authorised firm who had been granted permission under the regulatory gateway or was otherwise exempt.
  4. Paragraph 4 refers to section 55A of FSMA 2000, which relates to an application for permission to carry on one or more regulated activities. This amendment clarifies that an application for permission under the regulatory gateway is distinct and separate from this.
  5. Paragraph 5 refers to section 55O of FSMA 2000, which relates to the imposition of a requirement where control is acquired over a UK authorised firm with a Part 4A permission and there are no grounds for the FCA to exercise its own initiative power. The amendments take account of the regulatory gateway regime for these purposes.
  6. Paragraph 6 refers to section 55R of FSMA 2000. This amendment expands the remit within which the regulator can consider persons connected with a firm applying for a permission. When considering a new application under the regulatory gateway, or a variation or cancellation of an existing gateway permission, the regulator may consider persons connected with that firm where it is relevant.
  7. Paragraph 7 refers to section 55U of FSMA 2000, which relates to applications under Part 4A to carry on regulated activities. This amendment sets out that where an application is made for permission in respect of the regulatory gateway, or for variation of an existing permission, a statement must be included of the permission or variation sought.
  8. Paragraph 8 refers to section 55V of FSMA 2000. The amendment expands the requirement on the regulator to provide written notice when it grants an application for permission under the regulatory gateway, or for the variation or cancellation of such a permission.
  9. Paragraph 9 refers to section 55X of FSMA 2000, specifying when the regulator must give warning and decision notices to applicants. The amendment expands the obligation on the regulator to give the applicant a warning notice when it proposes to grant or vary a permission under the regulatory gateway, subject to other terms the regulator considers appropriate (which may be narrower than the application sought). In addition, if the regulator makes a decision to grant or vary a permission so that it is subject to other such terms, the regulator must give the applicant a decision notice.
  10. Paragraph 10 refers to section 55Y of FSMA 2000, which relates to the procedures the regulator must follow when exercising its own-initiative power. The amendments provide that when the regulator exercises its own-initiative power to vary, or proposes to vary, a gateway permission, it must follow the pre-existing procedure under section 55Y of FSMA 2000. This includes a requirement that if the FCA either proposes to vary a permission under the regulatory gateway, or varies a permission under the regulatory gateway with immediate effect, it must give the firm written notice.
  11. Paragraph 11 refers to section 55Z of FSMA 2000, which relates to the procedure for cancelling a permission. The amendments expand the remit of this procedure to take into account the regulatory gateway regime.
  12. Paragraph 12 refers to section 55Z3 of FSMA 2000, which relates to an applicant’s right to refer a regulator’s decision or exercise of its own-initiative variation or requirement power, to the Upper Tribunal. The amendment allows a firm to refer the FCA’s exercise of its own-initiative power to vary or cancel a permission under the regulatory gateway to the Upper Tribunal.

Schedule 6: Digital settlement assets

Part 1 – Amendments to the Banking Act 2009

  1. Schedule 6 extends the application of the existing scope of Part 5 of the Banking Act 2009 to include payment systems using digital settlement assets and digital settlement asset service providers. Therefore, consequential amendments are made to accommodate the differences between systems using digital settlement assets and more traditional payments systems (those which are currently regulated). This necessitates the inclusion of new sections covering those who are service providers connected to a digital settlement asset payment system. For example-
    1. Paragraph 4(4) of the Schedule introduces a definition of "digital settlement assets" as a new section 182(4A) of the Banking Act 2009, which includes a right to or interest in a digital settlement asset.
    2. Paragraph 4(5) of the Schedule adds a new section 182(5A) of the Banking Act 2009, intended to capture firms that provide one or more services in relation to a payment system chain. These could be those that safeguard, or safeguard and administer (such as wallets), stablecoin creators or issuers, exchange providers. Those who set rules are defined as "digital settlement asset service providers". This reflects the way in which stablecoin functions can be distributed across multiple entities. The same paragraph adds a new section 182(5B) which defines what "digital settlement asset exchange providers" are.
    3. Paragraph 4(5) adds a new section 182(5C) of the Banking Act 2009 allowing HM Treasury to amend the definitions in the new sections 182(4A) and 182(5A), via affirmative procedure, as necessary for HM Treasury to remain agile and responsive to market developments and safeguard against risks for consumer protection and financial stability purposes. Without such futureproofing, there is the risk of current definitions quickly becoming outdated and the measure would not capture entities intended for regulation.
  2. Paragraph 9 adds a new section 184A of the Banking Act 2009 enabling HM Treasury to issue recognition orders in respect of payments systems using digital settlement assets as is currently the case for traditional payment systems as well as a new section 185A at paragraph 10 which sets out the recognition criteria for such digital settlement assets service providers mirroring sections 184 and 185 for the power and criteria to make designation orders for traditional payment systems. Paragraph 17(b) adds a new section 190A which allows the Bank to direct systemic digital settlement assets to establish service provider rules mirroring its powers under section 190 as it can direct so for system rules.
  3. Paragraph 20 adds a new section 192A where the Bank may give direction to the FCA to refrain from certain action with respect to recognised digital settlement asset payment systems and recognised digital settlement asset service providers. This seeks to address the situation where an existing firm regulated by the FCA under either the EMR 2011 and the PSR 2017 is recognised as systemic – such that it is also regulated by the Bank in relation to financial stability risks under Part 5 of the Banking Act 2009.
  4. Paragraph 32(b) inserts a new section 203C which requires that the Bank issue a policy statement with respect to its overall policy approach with regard to its oversight of recognised digital settlement asset payment systems and recognised digital settlement asset service providers under Part 5 of the Banking Act 2009. This will ensure the means and mechanics of the new regime are sufficiently communicated to those operating within the market through a coordinated approach between the regulators, in this case the FCA who the Bank is required to consult with.
  5. Paragraph 37 amends section 206A to insert new subsections 206A(2A), 206(2B) and 206(3A) which confer powers on HM Treasury to make order(s) applying any sections under Part 5 of the Banking Act 2009 to those service providers who provide services to DSA service providers. This is intended to capture other service providers in relation to recognised DSA service providers or those who may themselves potentially become systemic but could not be recognised as systemic by HMT for systemic regulation in their own right.
  6. Paragraph 38 inserts a new section 206AA to acknowledge the difference between the normal payments chain and the digital settlement asset payments chain. In doing so, it seeks to capture service providers connected with a recognised payment system using digital settlement assets.

Part 2 – Amendments to FSBRA 2013

  1. This section extends the application of the existing scope of Part 5 of FSBRA 2013 to include payment systems using digital settlement assets and digital settlement asset service providers. Paragraph 41(2) inserts a new section 41(2A) amending the reference to funds to include digital settlement assets and then defines digital settlement asset, mirroring the Banking Act 2009 definition. This is so that the regulatory oversight for regulated payment systems which HM Treasury controls via designation orders, will be brought within scope of the PSR power as set out above.
  2. Paragraph 42(3) inserts a new section 42(5A) defining payment service providers mirroring the definition under the new section 182(5A) of the Banking Act 2009.
  3. Paragraph 43 amends section 98(5)(c) with respect to amending the FCA’s duty to ensure a co-ordinated exercise of functions so that such duties are extended with respect to its functions under the EMR 2011 and its functions in regulating credit institutions with Part 4A permissions and authorised Payment institutions that it regulates under PSR 2017.
  4. Paragraph 44 inserts definitions of "digital settlement asset" and "digital settlement asset exchange provider" to section 110 of FSBRA 2013. The latter cross-references back to the definition of "digital settlement asset exchange provider" in section 182(5B) of the Banking Act 2009. This ensures that, should the definition in the Banking Act 2009 be amended, the amendment will automatically flow through to FSBRA 2013.

Schedule 7: Accountability of the Payment Systems Regulator

  1. Paragraph 2 of the Schedule inserts new subsection (11A) in section 39 of FSBRA 2013 for the accountability of the Payment Systems Regulator (PSR) and in section 39(12) substitutes 107A for 107.

Paragraph 3: Regulatory principles of the PSR

  1. Paragraph 3 amends paragraph (c) of section 53 of FSBRA 2013 to embed the UK’s net zero target into the regulatory principles of the PSR, by confirming that the sustainable growth principle to which the PSR must have regard includes consistency with contributing towards achieving compliance with the targets made by the Secretary of State under the Climate Change Act 2008 and Environment Act 2021. The PSR determines whether the exercise of its functions is relevant to the need to contribute to the net zero target and the environmental targets made by the Secretary of State. Where the PSR determines that the function is relevant, the PSR must have regard to the regulatory principle in section 53 of FSBRA 2013.

Paragraph 4: Recommendations by HM Treasury

  1. Paragraph 4 inserts new section 102A which enables HM Treasury to make recommendations to the PSR about aspects of government economic policy to which the regulator should have regard, similar to section 1JA of FSMA 2000. The PSR must respond to those recommendations, in a corresponding set of provisions to section 35.

Paragraphs 5 to 7: Corresponding provisions

  1. Paragraphs 5 and 6 insert into FSBRA 2013 corresponding provision for the PSR as section 31 of this Act. Specifically, paragraph 5 inserts section 102B (Matters to consider when imposing generally applicable requirements) before section 103 (regulator’s general duty to consult). Paragraph 6(a) substitutes "Part" for "section" in 104(1), in the words before paragraph (a). Paragraph 6(b) inserts paragraph (ba) "an explanation of the ways in which having regard to specified matters under section 102B(2) has affected the proposed requirement" after 104(3)(b). Paragraph 6(c) inserts new subsections (12A) and (12B) after subsection (12). New subsection (12A) removes the requirement to provide the explanation referred to in subsection (3)(ba) in relation to any requirement if the requirement changes an existing requirement and the changes consist of, or include changes which, in the Payment Systems Regulator (PSR’s) opinion, are not material. New subsection (12B) provides that where an explanation is not provided by virtue of subsection (12A), the draft of the requirement must be accompanied by a statement of the PSR’s opinion.
  2. Paragraph 7 inserts into FSBRA 2013 corresponding provision for the PSR as sections 36, 29, 30, 43, 44 and 45. Adjustments are made to reflect that the PSR operates by imposing generally applicable requirements, such as general directions, and is not a rule-making authority. Adjustments are also made to reflect that the PSR is required to consult the FCA Cost Benefit Analysis Panel, rather than establish its own. References to the Financial Policy Committee ("FPC") are omitted as the FPC has no power of direction in relation to the PSR.

Paragraph 8: International trade obligations for the PSR

  1. Paragraph 8 inserts a new section 107A into FSBRA 2013, requiring the PSR to notify HM Treasury of a relevant action if it considers there to be material risk that the action would be incompatible with the UK’s international trade obligations. This is a corresponding provision to section 33, adjusted to refer to the PSR.
  2. Subsections (6), (8) and (9) of section 33 are not relevant to the PSR, so have no corresponding provision in this new section.

Paragraphs 9 to 11: Ancillary adjustments to FSBRA 2013

  1. Paragraph 9 inserts into section 110(1) of FSBRA 2013 a definition of a generally applicable requirement, which has the meaning given by section 104(1) of FSBRA 2013.
  2. Paragraph 10 inserts into section 143(2), after paragraph (b), a new subsection (ba) matters to consider when imposing generally applicable requirements and (bb) power to require imposition of generally applicable requirements, which ensure that the statutory instruments HM Treasury is permitted to make in relation to the accountability of the PSR require affirmative procedure.
  3. Paragraph 11 inserts into Schedule 4 of FSBRA 2013 a requirement that the PSR must include in its annual report any engagement with its statutory panel, in a corresponding provision to section 37.

Paragraph 12: Engagement with Parliamentary Committees for the PSR

  1. Paragraph 12 amends Schedule 4 to FSBRA 2013, inserting new paragraph 14A into the Schedule to establish the requirement for the PSR to notify the Treasury Select Committee when it publishes a consultation.
  2. Paragraph 13 also inserts new paragraph 14B into Schedule 4 to FSBRA 2013, which sets out the requirement that the PSR must reply to the chair of any Parliamentary Committee that has responded to a consultation published by the PSR. The qualification in new paragraph 14B(5) that the PSR does not need to supply any information that they consider is against the public interest operates only as a qualification of the new statutory duty itself. It does not purport to speak for any wider purpose (and therefore does not purport to limit the inherent jurisdiction of Parliament to require the production of papers or to summon witnesses).

Schedule 8: Cash access services

Part 1 – New Part 8B of FSMA 2000

  1. Part 1 of this Schedule inserts a new Part 8B titled "Cash Access Services" into FSMA 2000.
Section 131M: Overview
  1. This section provides a summary of the new Part 8B of FSMA 2000, which creates legislation to protect access to cash.
  2. It explains that Part 8B requires HM Treasury to publish a cash access policy statement (see section 131P), permits HM Treasury to designate legal persons that are involved in the provision of cash deposit and withdrawal services (which are defined in section 131N subsection (3)), and provides the Financial Conduct Authority (FCA) with powers over those persons designated by HM Treasury.
Section 131N: Cash access services and coordination arrangements
  1. This section defines the use of the terms "cash", "cash access service", "free cash access service", and "cash access coordination arrangements" for the purposes of this Part.
  2. Subsection (2) defines "cash" as banknotes and coins.
  3. Subsection (3) defines a "cash access service" as a service which enables cash to be placed on a relevant current account (as defined in section 131O) or which enables cash to be withdrawn from a relevant current account. Examples may include, but are not limited to, a cash withdrawal from an ATM or cash machine, cashback, or an over-the-counter cash withdrawal or deposit at a bank branch or Post Office.
  4. Subsection (3A) defines a "free cash access service" as a free of charge service that enables cash to be placed on a relevant personal current account, or enables cash to be withdrawn from a relevant personal current account.
  5. Subsection (4) defines "cash access coordination arrangements" as arrangements which are designed to coordinate the provision of cash access services by multiple providers, but which do not directly provide these services to any person. The core functions of such coordination arrangements may include monitoring cash access, assessing whether cash provision meets community needs (for example, in response to a closure or request from a local community), and commissioning the provision of solutions where required.
  6. Subsection (5) defines terms in relation to "cash access coordination arrangements". A reference to an "operator" of such arrangements means any person with responsibility for managing or operating such arrangements. A reference to the operation of such arrangements includes their management. Subsection (6) uses the same definition of ‘relevant current account’ as that contained under section 131O.
Section 131O: Current accounts and relevant current account providers
  1. This section defines "current account", "relevant current account", "relevant personal current account," and "relevant current account provider" for the purposes of this Part. These definitions are used in other parts of the legislation, for example, to specify the types of accounts that are within scope of the definition of cash access services and free cash access services (see section 131N) under this Part and the type of firm that HM Treasury may designate (see 131R).
  2. Subsection (2) describes the type of account that is intended to be within scope of this Part. It defines "current account" as an account by means of which one or more named persons are able to place cash, withdraw cash, and execute and receive "payment transactions" to and from third parties including execution of credit transfers. This is to cover the types of account by which customers facilitate their day-to-day transactions in cash. Subsection (3) defines "payment transaction" as an act initiated by the payer or payee, or on behalf of the payer, of placing, transferring or withdrawing funds.
  3. Subsection (3A) defines a "relevant personal current account" as an account held by one or more individuals for purposes outside any business, trade, craft or profession of that individual or those individuals. This is intended to limit provisions relating to free cash access services to accounts provided for personal use.
  4. Subsections (4) and (5) define a "relevant current account provider" and "relevant current account". "Relevant current accounts" are current accounts provided by legal persons in reliance on a Part 4A permission under FSMA 2000. "Relevant current account providers" are the legal persons that provide such accounts, subject to the exemptions in subsection (5). These are banks and building societies, and are the entities potentially in scope of new Part 8B (subject to the designation process set out in section 131R). Subsection (5) lists persons that are not "relevant current account providers" for the purposes of this Part. These are credit unions (as defined in the Credit Unions Act 1979 or Credit Unions (Northern Ireland) Order 1985); societies that are registered under Friendly Societies Act 1974 or incorporated under the Friendly Societies Act 1992.
  5. Subsection (6) permits HM Treasury to amend the definitions of this Part and any other related provisions of this Part.
Cash access policy statement
Section 131P: Cash access policy statement
  1. This section requires HM Treasury to set out a policy statement and describes the contents and process relating to such a policy statement. This enables HM Treasury to set out its policy with regards to access to cash withdrawal and deposit services, which the FCA must have regard to when exercising its functions to protect access to cash (see subsection 131U(2)).
  2. Subsection (1) provides that HM Treasury must prepare a cash access policy statement.
  3. Subsection (2) defines a policy statement as a statement of the government’s policies for cash access services in the United Kingdom, or a part of the United Kingdom.
  4. Subsection (2A) clarifies that reference to "cash access services" in subsection (2) includes free cash access services. This ensures that the cash access policy statement that HM Treasury must prepare under this Part, includes policies concerning free cash access services.
  5. Subsection (3) provides that the policy statement may state policies in relation to cash deposit and withdrawal services, services provided in relation to current accounts of different descriptions (for example personal and business current accounts) and services provided in urban and rural areas, among other things.
  6. Subsection (4) provides that when preparing a policy statement under this section HM Treasury must consult the FCA and have regard to any report provided to it by the FCA (see section 131Q).
  7. Subsections (5) and (6) provide that HM Treasury must publish a cash access policy statement in a manner that it thinks fit, and must keep the statement under review and may prepare a revised statement.
Section 131Q: Provision of reports to assist HM Treasury
  1. This section requires the FCA to provide reports to HM Treasury under this Part, if requested to do so by HM Treasury. This is to provide HM Treasury with the necessary data on cash provision in the UK required to support HM Treasury’s roles under the legislation, preparing the policy statement (section 131P) and designating persons (section 131R).
  2. Subsection (1) provides that the FCA, when requested by HM Treasury, must provide a report to HM Treasury.
  3. Subsection (2) sets out that HM Treasury may only request a report under this section for a report it reasonably requires in connection with the preparation of a policy statement (section 131P) or a decision on whether or not to designate a person for the purposes of this Part (section 131R).
  4. Subsection (3) determines the process for HM Treasury to make a request for a report. It states that a request must be made in writing and allows HM Treasury to require the FCA to send a report within a reasonable period of time as may be specified in the request.
  5. Subsection (4) determines that the FCA is not prevented or restricted from sharing information with HM Treasury for the purposes of providing reports to HM Treasury under this Part by section 348 of FSMA 2000 (restrictions on disclosure of confidential information), or regulations made under section 349, notably the Financial Services and Markets Act 2000 (Disclosure of Confidential Information) Regulations 2001. As per subsection (5), the disapplication of section 348 and regulations made under 349 in subsection (4) does not apply in relation to information provided to the FCA by a regulatory authority outside the United Kingdom.
Designation
Section 131R: Designation
  1. This section permits HM Treasury to designate persons for the purposes of this Part and specifies the procedure which HM Treasury must follow to designate a person. It provides HM Treasury with the ability to bring banks, building societies and operators of cash coordination arrangements within scope of the FCA’s functions relating to access to cash described below.
  2. Subsection (1) allows HM Treasury to designate a legal person if the person is a relevant current account provider (i.e. a bank or building society - see section 131O), or the operator of cash access coordination arrangements (see subsection 131N subsection (5)) if at least one of the participants in those arrangements is a designated relevant current account provider.
  3. Subsections (2) to (5) set out the procedure relating to designation under this Part. Subsection (2) states that a person is designated by giving the person a designation notice, and subsection (3) states that a designation notice must specify whether the person is designated for the whole of the United Kingdom, Great Britain only, or Northern Ireland only. Subsection (4) states that a designation notice to the operator of cash access coordination arrangements must specify the arrangements in as much detail as is reasonably practicable. Subsection (5) provides that before HM Treasury can give a designation notice to a person it must consult the FCA, notify the person, and consider any representations made.
  4. Subsection (6) provides that a designated person must comply with rules made by the FCA (see section 131V) and any directions given by the FCA (see section 131W).
Section 131S: Designation criteria
  1. This section sets out the purpose and criteria that HM Treasury must have regard to when designating a person.
  2. Subsection (1) provides that HM Treasury may only designate a person if it is satisfied that this is likely to further the FCA’s purpose of seeking to ensure reasonable provision of cash access services (see section 131U).
  3. Subsection (2) sets out criteria that HM Treasury must have regard to when considering whether to designate a relevant current account provider. These are:
    1. the distribution of cash access services operated by the provider in the United Kingdom, Great Britain or Northern Ireland (as the case may be);
    2. the distribution in the United Kingdom, Great Britain or Northern Ireland (as the case may be) of persons holding current accounts provided by the provider;
    3. the provider’s share of the current account market in the United Kingdom, Great Britain or Northern Ireland (as the case may be);
    4. the total value of the deposits held in current accounts provided by the provider in the United Kingdom, Great Britain or Northern Ireland (as the case may be).
  4. Subsection (3) makes clear that where a relevant current account provider is part of a group which includes other relevant current account providers, for example where there may be multiple banks within a banking group, references to "provider" are to be read as both the relevant current account provider HM Treasury is considering whether to designate and each of the other relevant current account providers that are part of the group. This allows HM Treasury, when considering whether to designate a person, to take into account the other relevant current account providers that are part of the group in accordance with the criteria in subsection (2).
  5. Subsection (4) provides that for the purposes of subsection (3) a "group" means the definition applied under section 421 of FSMA 2000, with the omission of subsection (1)(g) of that section as this relates to friendly societies, which are excluded from the definition of relevant current account providers under this Part.
Section 131T: Cancellation or variation of a designation notice
  1. This section permits HM Treasury to cancel or vary a designation notice given to a person. If HM Treasury varies a notice given to a person so that person is designated for a new or different part of the United Kingdom from the previous notice, sections 131R (3) and (5) and 131S apply. This means that:
    1. the varied document must specify for which part of the United Kingdom the person is designated (section 131R subsection (3));
    2. HM Treasury must consult the FCA, notify the person and consider any representations made (section 131R subsection (5));
    3. the purpose, criteria and related provisions set out in section 131S apply.
Supervision of designated persons
Section 131U: Purpose for which FCA must exercise functions under this Part
  1. This section sets out the purpose for which the FCA must exercise its functions in order to protect access to cash under this Part, and the considerations that the FCA must have regard to in relation to achieving this purpose.
  2. Subsection (1) provides that the FCA must exercise its functions under this Part for the purpose of seeking to ensure reasonable provision of cash access services in the United Kingdom or a part of the United Kingdom.
  3. Subsection (1A) clarifies that any references to "cash access service" in section 131U includes references to free cash access services. This ensures that the FCA’s purpose, as set out in section 131U, of seeking to ensure reasonable provision of cash access services includes seeking to ensure reasonable provision of free cash access services for relevant personal current accounts.
  4. Subsection (2) provides that for the purposes of this Part the FCA may determine what is meant by "reasonable provision" of cash withdrawal and deposit services. Reasonable provision of cash access services will include reasonable provision of free cash access services for relevant personal current accounts. This subsection also requires the FCA to have regard to the HM Treasury cash access policy statement currently in effect and any other matters that the FCA thinks appropriate.
  5. Subsection (3) and (4) supports the FCA’s ability to use its powers to address issues with access to cash at a local level. It provides that in making a determination of reasonable provision the FCA must have regard to any impacts of local deficiencies in the provision of cash access services that it considers to be significant, to the extent that it is aware of them. Subsection (4) defines a local deficiency as circumstance which, the FCA believes, limits the ability of persons in any local area in the United Kingdom to withdraw or place cash from or on a relevant current account.
  6. Subsections (5) and (6) provide that in determining whether there are local deficiencies, and their impacts, the FCA must have regard to the cash access policy statement currently in effect and any other such matters it thinks appropriate. Subsection (6) lists what these other matters may include (but are not limited to), such as the number of persons likely to be affected, their characteristics, and the likely impact upon them.
Section 131V: FCA rules
  1. This section gives the FCA powers to make rules that apply to designated persons as the FCA thinks is necessary or expedient in order to achieve the purpose set out in section 131U. The process for the FCA to make rules in relation to this Part reflects the process under the existing FSMA 2000 regime with appropriate modifications to ensure it functions effectively.
  2. Subsection (2) explains that rules made by the FCA under this section only apply to a designated person in relation to the part of the United Kingdom for which they are designated.
  3. Subsection (3) applies 137T (general supplementary powers for rules made by a regulator) FSMA 2000 to any rules made by the FCA under this section. This subsection sets out that references to "authorised persons, activity, or investment" in section 137T means designated persons (as defined section 131R) and their activities. Section 137T as it is applied to section 131V supplements the rule-making power, for instance permitting the FCA to make rules that make different provision for different cases and in respect of different descriptions of designated persons.
  4. Subsection (4) applies section 138A (modification or waiver of rules) FSMA 2000 to any rules made by the FCA under this section, except subsection (4)(b) of that section. Section 138A as it is applied to 131V has the effect of allowing the FCA to modify how rules made under section 131V apply to particular designated persons (or disapply them entirely).
  5. Subsection (5) applies section 138I (consultation by FCA before making rules) FSMA 2000 to any rules made by the FCA under this section. Section 138I as it is applied to 131V requires the FCA to consult and publish a draft of proposed rules before such rules may take effect, and to accompany any draft rules with explanation of the FCA’s reasons for believing the proposed rules are compatible with the FCA’s purpose to seek to ensure the reasonable provision of cash access services, as set out in section 131U.
Section 131W: Power to direct designated persons
  1. This section gives the FCA powers to give a direction under this section to a designated person.
  2. Subsection (1) provides that the FCA may only give a direction if it thinks the direction is desirable for the purpose mentioned in section 131U.
  3. Subsection (2) explains that a direction given by the FCA under this section only applies to a designated person in relation to the part of the United Kingdom that they are designated.
  4. Subsection (3) explains that a direction may include requiring a person to take specified action, refrain from taking a specified action, or to review - or take remedial action in respect of - past conduct.
  5. Subsection (4) allows the FCA to issue a new direction following the expiration of an existing direction.
  6. Subsection (5) permits the FCA to revoke a direction by written notice, and states that a direction ceases to be in force if the recipient is no longer a designated person.
Section 131X: Direction: procedure
  1. This section sets out the procedure by which the FCA can give a direction for the purposes of this Part.
  2. Subsection (1) requires the FCA to give written notice to the designated person to whom the direction is or will be given. A direction given by the FCA may take effect immediately, on a date specified by the FCA, or when the matter to which the notice relates is no longer open to review in accordance with section 391(8) of FSMA 2000 (see section 131X subsections (2) and (11)). Subsection (3) provides that a direction may only take effect immediately or on a specified date if the FCA thinks this is necessary.
  3. Subsection (4) sets out the details that the FCA must include in a written notice. These are: details of the direction; the FCA’s reasons for the direction and when it takes effect; information that the designated person may make representations to the FCA within a specified period in the notice and of the designated person’s right to refer to the Tribunal.
  4. Subsection (5) permits the FCA to extend the period specified in the notice for designated persons to make representations to the FCA.
  5. Subsection (6) requires the FCA to give written notice to a designated person if, having considered any representations, it decides to give the direction proposed or not revoke an existing direction. The notice must inform the person of their right to refer to the Tribunal (as stated in subsection (8)).
  6. Subsection (7) requires the FCA to give written notice to a designated person if, having considered any representations, it decides to not give the direction proposed, give a different direction (in which case this must comply with the requirements in subsection (4) as stated in subsection (9)), or revoke a direction.
  7. If a notice informs the designated person of their right to refer to the Tribunal it must give an indication of the procedure (as per subsection 10).
Section 131Y: Information gathering and investigations
  1. This section gives the FCA powers to obtain information and documents reasonably required by the FCA in connection with the exercise of functions under this Part, and the ability to investigate designated persons for the purposes of this Part. Such powers are intended to give the FCA the ability to collect information to inform reports to assist HM Treasury in preparing a policy statement and designating persons (see section 131Q), and to carry out their own functions under this Part 8B.
  2. This is achieved by applying Part 11 (information gathering and investigations) FSMA 2000 (see subsection (1)) with the exceptions of sections of 165A to 165C; 169; and 169A (see subsection (2)). These exceptions relate to powers of the Prudential Regulation Authority (165A to 165C) and assistance to overseas regulators (169 and 169A), which are not relevant to this Part 8B regime.
  3. Subsection (3) applies the provisions in Part 11 of FSMA 2000 to persons who are designated under this Part (relevant current account providers and operators of cash coordination arrangements, as per section 131R). All sections of Part 11, including powers relation to both information gathering and investigations, are applied to such designated persons, except those listed in subsection (2).
  4. Subsection (4) applies provisions in Part 11 that relate to information gathering only (i.e. not investigations) to persons who are not designated under this Part but may have relevant information to support the FCA in exercising its functions under this Part (see subsection 5).
  5. Subsection (5) lists the non-designated persons that are in scope of the FCA’s information gathering powers specified in subsection (4). The persons are:
    1. relevant current account providers who are not a designated person;
    2. operators of a cash access coordination arrangements who are not a designated person;
    3. operators of, or infrastructure providers in relation to, a payment system, who are not designated;
    4. any other person who provides cash access services and is not a designated person; and
    5. any other person who provides a relevant service to a person mentioned in paragraph (a), (b), (c) or (d) and is not a designated person.
  6. Subsections (6) and (7) define terms used in subsection (5). Any references to a "payment system", an "operator" and "infrastructure provider" in relation to a payment system, have the same meanings as in Part 5 of the Financial Services (Banking Reform) Act 2013 (see section 110 of that Act). Any references to a "relevant service" in subsection 5(e) is a service provided in connection with the provision of cash access services.
  7. Subsection (8) clarifies that, for the purposes of its application to this Part 8B, any reference in Part 11 to "either regulator" is to the FCA only.
Section 131Z: Disciplinary Measures
  1. This section gives powers to enforce requirements imposed by or under this Part on designated persons. This is achieved by applying Part 14 of FSMA 2000 (disciplinary measures) as if reference to "authorised persons" includes a person who is designated for the purposes of this Part. This allows the FCA to issue public statements or impose financial penalties in response to contraventions of requirements such as rules or directions. Subsection (b) omits section 206A of FSMA 2000 which relates to suspending permission to carry on regulated activities.
Section 131Z1: Costs of supervision
  1. The FCA is to be able to collect fees in order to cover the costs of supervision, for example costs associated with day to day supervision, or with appointing an investigator. This section restricts the FCA’s ability to collect such fees in relation to functions under this Part to designated relevant current account providers (i.e. designated banks and building societies).
Section 131Z2: Exclusion and modification of general duties
  1. This section requires that, when exercising its functions under this Part, the FCA must, so far as is reasonably possible, act in a way which is compatible with its strategic objective and advances its access to cash purpose (section 131U) in place of its operational objectives. The FCA’s competition duty (subsection 1B(4) of FSMA 2000) and economic competitiveness and growth objective (subsection 1B(4A) are also disapplied in relation to this Part.
  2. Subsection (2) ensures that the FCA’s regulatory principles (in section 3B of FSMA 2000) are appropriately modified, by including a reference to the FCA’s purpose in relation to access to cash (section 131U) in paragraph (g) which relates to the publication of information as a means of contributing to the advancement of the FCA’s objectives.
  3. Subsection (3) ensures that the existing decision-making procedure in section 395 of FSMA 2000 applies appropriately for a direction made under section 131W.

Part 2 – Consequential amendments to FSMA 2000

  1. Part 2 of this Schedule makes consequential amendments to FSMA 2000 as a result of the introduction of Part 8B.
    1. Paragraph 2 introduces amendments to FSMA 2000.
    2. Paragraph 3 amends subsection (4) of section 3D of FSMA 2000, to enable the FCA to coordinate with the Prudential Regulation Authority (PRA) regarding the FCA’s functions under this part.
    3. Paragraph 4 amends subsection 55H(4) to allow the FCA to refuse an application to vary a permission under Part 4A if it appears to the FCA that it is desirable to do so in order to advance the FCA’s purpose under this Part.
    4. Paragraph 5 amends subsection 55L(6) to allow the FCA to refuse an application to impose, vary or cancel a requirement in relation to a Part 4A permission if it appears to the FCA that it is desirable to do so in order to advance the FCA’s purpose under this Part.
    5. Paragraph 6 amends section 55T as a consequence of the amendments in paragraphs 4 and 5.
    6. Paragraph 7 amends section 232A so that the ombudsman scheme operator’s duty to provide information to FCA applies in relation to information relevant to this Part.
    7. Paragraph 8 amends subsection 395 in order to enable the application of the existing process for decision making with regards to directions issued under section 131W.
    8. Paragraph 9 amends subsection 429(2) to apply the affirmative procedure to regulations made under 131O.

Schedule 9: Wholesale cash distribution

Part 1 – New Part 5A of the Banking Act 2009

  1. Part 1 of this Schedule inserts a new Part 5A into the Banking Act 2009.
Section 206C: Overview and purpose
  1. This section summarises the purpose of this Part. This Part permits the Bank to oversee certain persons involved in wholesale cash distribution (as defined in section 206E) (see subsection (1)).
  2. The Bank must exercise its powers under this Part for the purpose of managing risks to the effectiveness, resilience, and sustainability of wholesale cash distribution throughout the United Kingdom, or throughout any part of the United Kingdom (see subsection (2)).
Section 206D: Policy statement
  1. This section sets out the policy statement requirements. Subsection (1) provides that the Bank must prepare a statement of its policy with respect to the exercise of its powers under this Part, and must from time to time review the statement, and may prepare a revised statement.
  2. Subsection (2) provides that when preparing a statement under this section the Bank must consult such persons as appear to the Bank to be representative of persons likely to be affected by the statement.
  3. Subsection (3) provides that after preparing a statement under this section the Bank must provide the statement to HM Treasury and publish the statement. Subsection (4) provides that HM Treasury must lay a copy of each statement received before Parliament.
  4. Subsection (5) provides that no power conferred on the Bank by this Part may be exercised before a statement under this section has been published.
Section 206E: Interpretation: "wholesale cash distribution"
  1. This section defines the use of the terms "wholesale cash distribution" and "wholesale cash distribution activities". In this Part, "wholesale cash distribution" means arrangements by which cash is made available for retail cash distribution and removed from circulation, and "wholesale cash distribution activities" are activities intended to facilitate or control wholesale cash distribution and include (but are not limited to) purchasing cash from issuing authorities or the Mint; storing cash; transporting cash; undertaking authentication processes; and returning cash to issuing authorities or the Mint (see subsection (1)).
Section 206F: Interpretation: other terms
  1. This section defines other terms used in this Part. In particular, "FCA" means the Financial Conduct Authority; "Part 4A permission" has the meaning given by section 55A of FSMA 2000; "PRA" means the Prudential Regulation Authority; "the UK financial system" has the meaning given by section 1I of FSMA 2000.
Recognised persons
Section 206G: Wholesale cash oversight orders
  1. This section sets out how and when HM Treasury may specify a person as a recognised person and the information that must be recorded in a wholesale cash oversight order. HM Treasury may, by a wholesale cash oversight order, specify a person as a recognised person for the purposes of this Part (see subsection (1)) if the person performs a relevant function in relation to a wholesale cash distribution activity and is recognised as having market significance in accordance with section 206H (see subsection (2)). A "relevant function" is defined in subsection (3).
  2. Subsection (4) provides that a wholesale cash oversight order must specify in as much detail as is reasonably practicable each wholesale cash distribution activity in relation to which the specified person performs a relevant function and each relevant function the person performs.
  3. Subsection (5) provides that HM Treasury is not permitted to make a wholesale cash oversight order in respect of an issuing authority or the Mint. Authorised banks that are issuing authorities may be subject to an order in respect of their activities that are not in their capacity as an issuing authority.
Section 206H: "Market significance" and "systemic significance"
  1. This section explains the relevance of "market significance" and "systemic significance" in the context of wholesale cash oversight orders.
  2. Subsection (1) provides that a wholesale cash order must specify whether the person in respect of whom the order is made is recognised as having market significance only, or as also having systemic significance.
  3. Subsection (2) provides that HM Treasury may recognise a person as having market significance only if satisfied that any significant deficiency in, or disruption to, the performance of the person’s relevant functions in relation to wholesale cash distribution activities would be likely to undermine the effectiveness, resilience, or sustainability of wholesale cash distribution throughout the United Kingdom, or throughout any part of the United Kingdom.
  4. Subsection (3) provides that HM Treasury may recognise a person as having systemic significance only if satisfied that any significant deficiency in, or disruption to, the performance of the person’s relevant functions in relation to wholesale cash distribution activities would be likely (in addition to the consequences mentioned above) to threaten the stability of, or confidence in, the UK financial system, or to have serious consequences for business or other interests throughout the United Kingdom or any part of the United Kingdom.
  5. Subsection (4) provides that where a person is part of a group, HM Treasury may have regard to functions performed by other members of the group when determining the matters mentioned in subsection (2) or (3). In this subsection "group" has the meaning given by section 421 of the Financial Services and Markets Act 2000 (see subsection (5)).
  6. Subsection (6) provides that HM Treasury may not recognise a person as having systemic significance if the person is a company wholly owned by the Crown.
Section 206I: Procedure
  1. This section sets out the procedure for the making of a wholesale cash oversight order. In particular, HM Treasury must first consult the Bank, notify the person, and consider any representations made (see subsection (1)).
  2. Subsection (2) provides that HM Treasury must, in addition to the requirements in subsection (1), consult the FCA before making a wholesale cash oversight order in respect of a person who has, or has applied for, Part 4A permission. Where the person has, or has applied for, Part 4A permission for the carrying on of a PRA-regulated activity, HM Treasury must also consult the PRA. Where the person is a participant in a regulated payment system (as defined in subsection (3)), HM Treasury must also consult the Payment Systems Regulator. In carrying out the consultation in accordance with subsection (2) HM Treasury must consider any representations made before making the wholesale cash oversight order.
  3. Subsection (4) provides that in considering whether to make the wholesale cash oversight order, HM Treasury may rely on information provided by the Bank, the FCA, the Payment Systems Regulator or the PRA.
Section 206J: Amendment or revocation of a wholesale cash oversight order
  1. Subsection (1) provides that HM Treasury may amend or revoke a wholesale cash oversight order.
  2. Subsection (2) provides that HM Treasury must revoke a wholesale cash oversight order if it is no longer satisfied that the person specified in the order performs a relevant function in relation to a wholesale cash distribution activity and has market significance.
  3. If HM Treasury is satisfied that the person continues to have market significance but is no longer satisfied that the person has systemic significance, then HM Treasury must amend the order so that it no longer specifies that the person is recognised as having systemic significance (see subsections (3) and (4)).
  4. Subsection (4) provides that subject to subsections (2) to (3), HM Treasury must consider any request by a person specified in a wholesale cash oversight order for the amendment or revocation of the order.
  5. Subsection (5) provides that the procedure as set out in section 206I applies to the amendment or revocation of a wholesale cash oversight order as it applies to the making of the order.
Regulation
Section 206K: Principles
  1. Subsection (1) gives the Bank the power to publish principles to which recognised persons must have regard in performing relevant functions in relation to wholesale cash distribution activities.
  2. Principles of general application may be published. Alternatively, subsection (2) provides that different principles may be published in relation to different wholesale cash distribution activities; different relevant functions; persons recognised as having market significance only and persons recognised as also having systemic significance.
  3. Subsection (3) provides that prior to publishing such principles, the Bank must consult such persons as appear to the Bank to be representative of persons likely to be affected by the principles and obtain the approval of HM Treasury.
Section 206L: Code of Practice
  1. This section gives the Bank the power to publish codes of practice about the performance by recognised persons of relevant functions in relation to wholesale cash distribution activities (see subsection (1)). Codes of practice are intended to set out binding requirements, whereas principles (made under section 206K) are intended to provide high-level over-arching guidance.
  2. Codes of general application may be published. Alternatively, subsection (2) provides that different codes of practice may be published in relation to different wholesale cash distribution activities; different relevant functions; and persons recognised as having market significance only and persons recognised as also having systemic significance.
  3. Subsection (3) provides that before publishing a code of practice, the Bank must consult such persons as appear to the Bank to be representative of persons likely to be affected by the code.
Section 206M: Directions
  1. This section gives the Bank power to give directions in writing to a recognised person (see subsection (1)). This may include requiring or prohibiting the taking of specified action in relation to the performance of a specified relevant function in relation to a specified wholesale cash distribution activity. It may also include setting standards to be met in the performance of a specified relevant function in relation to a specified wholesale cash distribution activity (see subsection (2)).
  2. Subsections (3) and (4) provide that if the Bank gives a direction to a recognised person for the purpose of resolving or reducing a threat to the stability of the UK financial system, the recognised person (including the recognised person’s officers and staff) has immunity from liability in damages in respect of action or inaction in accordance with the direction.
  3. Subsection (5) sets out that a direction given to a recognised person for the purpose of resolving or reducing a threat to the stability of the UK financial system must include a statement that it is given for that purpose and inform the recognised person of the effect of immunity from liability in damages in respect of action or inaction in accordance with the direction.
  4. Subsection (6) provides that HM Treasury may confer, by regulations, immunity on any person from liability in damages in respect of action or inaction taken by a person in accordance with the direction of the Bank, including a direction to a recognised person for the purpose of resolving or reducing a threat to the stability of the UK financial system. Subsection (7) sets out the procedure for making an order under subsection (6).
  5. Immunity from liability conferred under this section does not extend to action or inaction taken in bad faith or in contravention of section 6(1) of the Human Rights Act 1998.
Section 206N: Role of the FCA, the PRA and the Payment Systems Regulator
  1. This section sets out the role of the FCA, the PRA and the Payment Systems Regulator. Under subsection (1), the Bank of England is required to have regard to any action which the FCA, the PRA or the Payment Systems Regulator has already taken or could take when exercising its powers.
  2. Under subsection (2), as part of the requirement at subsection (1), the Bank of England is required to consult FCA before taking action in respect of a person who is regulated or has applied to be regulated. There is also a requirement to consult the PRA where it is in respect to a person who has applied for Part 4A Permission to carry out PRA regulated activity. Where the Payment Systems Regulator is involved, there is also a requirement for the Bank of England to consult the regulator before taking action in respect to a participant in a regulated payment system.
  3. Subsection (3) provides the source for definition for "participant" and "regulated payment system" for the purposes of subsection (2)(c) ascribing to them the same meaning as that contained at section 110 of the Financial Services (Banking Reform) Act 2013.
  4. Subsection (4) stops the Bank of England from taking action in respect to a person described under subsection (2) if the FCA, the PRA or the Payment Systems Regulator has given notice to the Bank of England that they are considering taking action. The exception to this requirement not to take action is whereby the FCA, the PRA or the Payments Systems Regulator have consented or withdrawn the notice.
Enforcement
Section 206O: Inspection
  1. This section gives the Bank the power to appoint one or more persons to inspect the performance by a recognised person of a relevant function in relation to a wholesale cash distribution activity (see subsection (1)). This power allows the Bank to appoint an inspector to check that codes of practice, principles, or directions are being complied with, or that the performance by a recognised person of a relevant function is being carried out in a satisfactory manner.
  2. Subsection (2) requires a recognised person who performs a relevant function in relation to a wholesale cash distribution activity to co-operate with an inspector and grant the inspector access, on request and at any reasonable time, to premises on or from which any part of the function is performed, and otherwise co-operate with an inspector.
Section 206P: Inspection: warrant
  1. This section provides that an inspector may apply for a warrant entitling the inspector or a constable to enter premises if there is performed on the premises any part of a relevant function in relation to a wholesale cash distribution activity. The application for a warrant is to be made to a justice of the peace (or in Scotland, to a justice of the peace or a sheriff; in Northern Ireland, to a lay magistrate), who can issue the warrant only if one or more of the conditions set out in subsections (2), (3), (4) and (5) are fulfilled:
    1. Condition 1: The Bank has issued a notice under Information section 206Z3 and the requirement has not been complied with, and it is reasonable to believe that relevant documents or information are on the premises.
    2. Condition 2: An information requirement has been imposed under section 206Z3, there is reason to suspect that it would not be complied with or that the documents or information would be destroyed or tampered with.
    3. Condition 3: An inspector appointed under section 206O gave reasonable notice of a wish to enter the premises and was refused entry to those premises.
    4. Condition 4: A person occupying or managing the premises has failed to co-operate with an inspector.
  2. Subsection (6) sets out that a warrant issued in accordance with this section will permit an inspector or a constable to enter the premises, to search and take possession of information or documents, take copies, and permit a constable to use reasonable force.
  3. Subsection (7) applies to warrants issued in accordance with this section, sections 15(5) to (8) and 16 of the Police and Criminal Evidence Act 1984 which provide that a warrant may authorise persons to accompany the constable executing it and permit that person to have the same powers as the constable in relation to the warrant. Subsections (8) and (9) make similar provision about the application to warrants issued in accordance with this section in Scotland and Northern Ireland.
Section 206Q: Independent report
  1. Subsection (1) enables the Bank to require a recognised person who performs a relevant function in relation to a wholesale cash distribution activity to appoint an expert to provide a report on the performance of the function.
  2. Subsection (2) specifies that the Bank may only impose this requirement where the Bank thinks that the person is not having sufficient regard to the principles published by the Bank under section 206K; the person is failing to comply with a code of practice under section 206L; or the report is likely for any other reason to assist the Bank in the performance of its functions under this Part.
  3. Subsection (3) enables the Bank to impose requirements about the nature of the expert to be appointed, the content of the expert’s report, how the report is subsequently treated (including whether or not it is to be disclosed or published); and the timeframe within which the report must be produced.
Section 206R: Compliance failure
  1. This section defines the use of the term "compliance failure" throughout this Part. A compliance failure is taken to mean the failure by a recognised person to comply with a code of practice (section 206L), with a direction made by the Bank (section 206M), or with a requirement to ensure compliance with regard to producing an independent report (section 206Q).
Section 206S: Publication
  1. This section gives the Bank the power to publish details of a compliance failure by a recognised person and gives the Bank the power to publish details of a sanction imposed under sections 206T to 206V.
Section 206T: Penalty
  1. In the event of a compliance failure, subsection (1) gives the Bank the power to impose on a recognised person a financial penalty.
  2. Subsection (2) provides that the financial penalty is to be paid to the Bank and is enforceable as a debt.
  3. Subsections (3) and (4) specify that the Bank must prepare and publish on its website a statement of principles which it will apply in determining whether to impose a penalty, and the quantum of the penalty, for compliance failures under this Part. The Bank must send a copy of the statement to HM Treasury, review the statement from time to time and revise the statement, if necessary. In considering financial penalties for compliance failures under this Part, the Bank must apply the statement in force when the failure occurred.
Section 206U: Closure
  1. This section enables the Bank to give a closure order to a person recognised for the purposes of this Part as having systemic significance only.
  2. Subsection (1) provides that the Bank may make a closure order only if it is satisfied that a compliance failure threatens the stability of, or confidence in, the UK financial system, or has serious consequences for business or other interests throughout the United Kingdom.
  3. Subsection (2) gives the Bank the power to specify that a recognised person must cease operation for a specified time, until further notice, or permanently.
  4. Subsection (3) provides that before giving a closure order to a recognised person, the Bank must have regard to the public interest in the continued performance by the person of relevant functions (whether or not specified) in relation to wholesale cash distribution activities (whether or not specified).
  5. Subsection (4) makes it an offence for a recognised person to fail to comply with a closure order. A fine may be imposed on a person found guilty of contravening an order issued under this section (see subsection (5)).
Section 206V: Management disqualification
  1. This section enables the Bank to make an order to disqualify a specified person from holding an office or position involving responsibility for taking decisions about the management of a recognised person for either a specified period, until further notice, or permanently (see subsection (1)).
  2. Under subsection (2) it is an offence for a person to breach a prohibition issued in accordance with subsection (1). A fine may be imposed on a person found guilty of contravening an order issued under this section (see subsection (3)).
Section 206W: Warning
  1. This section requires the Bank to give a warning notice of its intention to impose a sanction and allow 21 days for the person to whom the notice relates to make representations, which the Bank must consider before it may impose a sanction under this Part. The Bank must issue a decision notice stating whether or not it intends to impose the sanction.
  2. In certain circumstances the Bank has power, under subsection (3), to give a closure order under section 206U or to make an order under section 206V without giving a warning notice. The Bank may make such orders if, for instance, the recognised person is committing a compliance failure of such a serious nature that it poses an imminent threat to the stability of the UK financial system.
Section 206X: Appeal
  1. This section provides for appeals against the Bank’s decision to impose a sanction under this Part. Where the Bank notifies a person under section 206W(1) that it intends to impose a sanction, the person may appeal to the Upper Tribunal (see subsection (1)). Where the Bank imposes a sanction on a person without notice in reliance on section 206W(3), the person may appeal to the Upper Tribunal (see subsection (2)). The Bank may not impose a sanction while an appeal under this section could be brought or is pending (see subsection (3)).
Section 206Y: Injunctions
  1. This section provides for injunctions in favour of the Bank.
  2. If, on the application of the Bank, the court is satisfied that there is a reasonable likelihood that there will be a compliance failure, or that there has been a compliance failure and there is a reasonable likelihood that it will continue or be repeated, the court may make an order restraining the conduct constituting the failure (see subsection (1)).
  3. If, on the application of the Bank, the court is satisfied that there has been a compliance failure by a recognised person, and that there are steps which could be taken for remedying the failure, the court may make an order requiring the recognised person, and any other person who appears to have been knowingly concerned in the failure, to take such steps as the court may direct to remedy it (see subsection (2)).
  4. If, on the application of the Bank, the court is satisfied that there may have been a compliance failure by a recognised person, or that any other person may have been knowingly concerned in a compliance failure, the court may make an order restraining the person from dealing with any assets which it is satisfied the person is reasonably likely to deal with (see subsection (3)).
  5. Subsection (4) provides that in England and Wales and Northern Ireland the jurisdiction conferred by this section is exercisable by the High Court and in Scotland by the Court of Session.
  6. 1459 Subsection (5) explains how provisions in this section are to be interpreted in Scotland.
Miscellaneous
Section 206Z: Fees
  1. This section enables the Bank to require a recognised person to pay fees (see subsection (1)) but only in accordance with a scale of fees set by HM Treasury in regulations (see subsection (2)). Subsection (4) specifies that the requirement to pay fees may be enforced by the Bank as a debt.
Section 206Z1: Records
  1. This section provides that the Bank must maintain satisfactory arrangements for recording decisions made in the exercise of functions under this Part and the safe keeping of those records which it considers ought to be preserved (see subsection (1)).
Section 206Z2: Annual report
  1. This section provides that the Bank must, at least once a year, make a report to HM Treasury on the discharge of its functions under this Part and such other matters as HM Treasury may from time to time direct (see subsection (1)). Subsection (1) does not require the inclusion in the report of any information the publication of which would, in the opinion of the Bank, be against the public interest (see subsection (3)).
  2. A report on the discharge of the Bank’s functions under this Part must, in particular, include the Bank’s opinion as to the extent to which risks to the effectiveness, resilience and sustainability of wholesale cash distribution throughout the United Kingdom, or throughout any part of the United Kingdom, have been managed, and the extent to which, in relation to the exercise of functions in relation to persons recognised as having systemic significance, risks to the stability of the UK financial system have been managed (see subsection (2)).
  3. HM Treasury must lay before Parliament a copy of each report received under this section (see subsection (4)).
Section 206Z3: Requirement to provide information
  1. This section provides that the Bank may by notice in writing require a person to provide information which the Bank thinks will help HM Treasury in determining whether to make a wholesale cash oversight order (section 206G) or which the Bank otherwise requires in connection with its functions under this Part (see subsection (1)). The Bank may also by notice in writing require a person who performs a relevant function in relation to wholesale cash distribution activity to provide information which the Bank requires in connection with the exercise of its functions (whether under this Part or otherwise) in pursuance of the purpose mentioned in section 206C(2), or the Bank’s financial stability objective. A notice under subsection (1) or (2) may require the person to notify the Bank if events of a specified kind occur (see subsection (3)). A notice under subsection (1) or (2) may require information to be provided in a specified form or manner at a specified time in respect of a specified period (see subsection (4)).
  2. Under subsection (5) it is an offence for a person to fail without reasonable excuse to comply with a requirement under this section or knowingly or recklessly to give false information in pursuance of this section. Under subsection (6)(a), a fine may be imposed on a person found guilty of contravening a notice issued under this section.
Section 206Z4: Disclosure of information
  1. This section permits the Bank to disclose information obtained by virtue of section 206Z3 to HM Treasury, the FCA, the PRA, and The Royal Mint (see subsection (1)). Subsection (1) overrides a contractual or other requirement to keep information in confidence and is without prejudice to any other power to disclose information (see subsection (2)).
  2. HM Treasury may by regulations permit the disclosure by the Bank of specified information obtained by virtue of section 206Z3 to specified persons and permit the publication of specified information and make provision about the manner and extent of publication (see subsection (3)).
Section 206Z5: Saving for informal oversight
  1. This section clarifies that nothing in Part 5A prevents the Bank of England either from having dealings with persons who are not recognised persons for the purposes of the Part or from having dealings with recognised persons other than through the provisions of the Part.
Section 206Z6: Power to disapply regulation and enforcement provisions
  1. This section permits HM Treasury by regulations to provide for any of sections 206K to 206Z4 not to apply, or to apply with modifications, in relation to recognised persons that are companies wholly owned by the Crown (see subsection (1)). For the purposes of this section, a company is wholly owned by the Crown if, and only if, every member of the company is a Minister of the Crown, government department or company wholly owned by the Crown, or a person acting on behalf of a Minister of the Crown, government department or company wholly owned by the Crown (see subsection (5)).
  2. Before making regulations under this section HM Treasury must consult the Bank.
  3. Subsection (4) makes provision about the procedure for regulations made under subsection (1).
  4. Section 206Z6 allows HM Treasury to, by regulations, provide for a company wholly owned by the Crown to be a person recognised as having market significance. Currently there is only one company that is both wholly owned by the Crown and operating in the wholesale cash distribution market. Existing oversight arrangements over this company are envisaged to be sufficient to safeguard against any risks that may arise should the company become systemic. HM Treasury intends for wholly Crown-owned entities to be within scope of market oversight designation only, but with a power for HM Treasury to disapply some or all of the powers under the regime for Crown-owned entities at the point of designation, if deemed appropriate.

Part 2 – Amendments to Part 6 of the Financial Services (Banking Reform) Act 2013

  1. Part 2 of this Schedule makes amendments to Part 6 of the Financial Services (Banking Reform) Act 2013. These amendments extend the special administration regime for operators of certain infrastructure systems to also include persons recognised for the purposes of Part 5A of the Banking Act 2009. This ensures that a special administration regime (SAR) applies to entities designated as having systemic significance.
  2. Paragraph 2 provides that Part 6 of the Financial Services (Banking Reform) Act 2013 (to provide for special administration arrangements to apply to certain persons) is amended as follows.
  3. Paragraph 3 amends section 111 (financial market infrastructure administration) to refer to a new term "financial market and cash infrastructure" for the purposes of Part 6.
  4. Paragraph 4 provides that section 112 (interpretation: infrastructure companies) is amended to include persons recognised under Part 5A as having systemic significance within the definition of an "infrastructure company".
  5. Paragraph 5 amends section 113 (interpretation: other expressions) to include within the definition of "the relevant system" in relation to an infrastructure company falling within section (2)(ba) "any system used by the company to facilitate or control wholesale cash distribution".
  6. Paragraph 6 amends section 115 (objective of FMI administration) to provide that where an FMI administrator is appointed in relation to a company that is a person recognised for the purposes of Part 5A of the Banking Act 2009, the objective of the FMI administration is (a) to ensure that the functions performed by the person in relation to wholesale cash distribution are and continue to be performed efficiently and effectively, and (b) to ensure by one or both of the specified means that it becomes unnecessary for the FMI administration order to remain in force for that purpose or those purposes.
  7. Paragraph 7 amends section 119 (continuity of supply). The definition of "supply" is amended to include, in the case of an infrastructure company that is a person recognised for the purposes of Part 5A of the Banking Act 2009, goods and equipment used by the person in connection with wholesale cash distribution activities.
  8. Paragraph 8 amends section 120(8) (power to direct FMI administrator) to state that the section does not limit the powers conferred on the Bank by section 206M(directions) of the Banking Act 2009 in relation to a person recognised as having systemic significance for wholesale cash distribution.
  9. Paragraph 9 amends section 127(1) (interpretation of Part) to state that the terms "wholesale cash distribution" and "wholesale cash distribution activities" have the meanings given by section 113.

Part 3 – Consequential amendments

  1. Part 3 of this Schedule makes consequential amendments to the Banking Act 2009 which are needed as a result of the amendments in Part 1 of this Schedule.
  2. Paragraph 10 introduces amendments to Banking Act 2009.
  3. Paragraph 11 amends the table contained at section 259(3) of the Banking Act 2009 by adding four new rows and three columns in a table with the heading (Part 5A-Wholesale cash distribution) to continue the table after 206A (services forming part of recognised payment systems). This table sets out the procedures as follows: in the first row under the heading, where the Bank of England issues directions: immunity under section 206M this should be done following the negative resolution procedure. In the second row, section 206Z for fees should follow the negative resolution procedure. In the third row which is for information powers, the negative resolution is followed and where section 206Z6 which is the power to disapply regulation and enforcement provisions, the draft affirmative resolution is followed.
  4. Paragraph 12 makes some changes to the index of defined terms to be found under section 261 of the Banking Act 2009. The row where "FCA" appears under the expression column, section 206F is added after 183 to include it in the index of defined terms which should read "3, 93, 166, 183 & 206F]". In the entry for "Payment Systems Regulator" in the second column section 206F is added after so that it reads "183 & 206F). At (c), in the row for the PRA in the second column "206F" is also added to read "183 & 206F). This table sets out expressions defined in the Banking Act 2009 for general purposes.
  5. Paragraph 13 introduces amendments to the Financial Services Act 2012.
  6. Paragraph 14(1) amends section 85 at subsection (3)(a) of the Financial Services Markets Act 2012 which deals with relevant functions of the Bank of England in relation to the complaints scheme by making wholesale cash distribution a relevant function.
  7. Paragraph 14(3)(a) adds wholesale cash distribution functions of publishing principles under section (206K) or codes of practice under section 206L as legislative functions in section 85(7) of Banking Act 2009. Paragraph 14(3)(c) makes preparing a statement of principles by the Bank of England under section 206T(3) a legislative function.
  8. Paragraph 15(1) introduces amendments to section 110 of the Banking Act 2009 which deals with payments to HM Treasury of penalties received by the Bank of England. Paragraph 15(2) amends section 110(2)(b) to add penalties received under new Part 5A section 206T.
  9. Paragraph 15(3) adds sections 206S to 206V and 206Y to the enforcement powers of the Bank of England for the purposes of section 110(7).
  10. Paragraph 16 deals with amendments necessary in the Financial Services (Banking Reform) Act 2013. The new Part 5A (wholesale cash distribution) is added to ensure coordinated exercise of functions in section 98.

Schedule 10: Performance of functions relating to financial market infrastructure

Part 1 – New Chapter 2A of Part 18 of FSMA 2000

  1. Paragraph 1 inserts a new "Chapter 2A: Performance of Functions of Recognised Bodies" into Part 18 of FSMA 2000, comprising new sections 309A to 309Z8 of FSMA 2000, and making provision for a Senior Managers & Certification Regime for recognised central counterparties (CCPs), recognised investment exchanges (RIEs) and recognised central security depositories (CSDs), and a power to apply the regime to credit rating agencies (CRAs).
  2. Section 309A enables HM Treasury to make regulations which, in effect, apply the new Chapter 2A to CCPs, CSDs or RIEs designating them as a "relevant recognised body" for the purpose of the regime. This section provides that, if HM Treasury wishes to apply the regime to RIEs, it must consult the Financial Conduct Authority ("FCA"), and that if it wishes to apply the regime to recognised CCPs or recognised CSDs, it must consult the Bank of England ("the Bank"). HM Treasury is also required to consult anyone who is likely to be affected by the application of this Chapter to a particular type of recognised body, for example the firms themselves. Section 309A (4) clarifies that where the "relevant recognised body" is an RIE, the appropriate regulator for the purpose of this Chapter is the FCA, and that for CCPs and CSDs it is the Bank.
  3. Section 309B provides that, if the appropriate regulator considers that an individual is not a fit and proper person to perform functions which relate to any activity (regulated or unregulated) carried on by a relevant recognised body it regulates, it can make a "Part 18 prohibition order". A Part 18 prohibition order is an order which prohibits an individual from performing a particular function, any function within a particular category, or any function. Sections 309B (3) and (4) clarifies the types of activities and persons that a prohibition order may relate to. The regulators have the power to make a range of prohibition orders, depending on the circumstances of each case and the range of activities which the relevant individual would not be considered fit to undertake. They can also make provision prohibiting the individual from performing functions in relation to a regulated activity (or regulated activities) carried out by a person who is authorised or exempt under FSMA 2000, or a person to whom, as a result of Part 20 of FSMA 2000, the general prohibition does not apply in relation to a regulated activity. This would allow, for example, the Bank to issue a prohibition order that prevented an individual not only from performing functions in respect of activities carried out by a CCP, CSD, RIE or CRA, but also functions in respect of regulated activities (or activities that would otherwise be regulated) within any other type of entity subject to the SM&CR in Part 5 of FSMA 2000.
  4. Section 309C sets out the procedure for making Part 18 prohibition orders. The appropriate regulator may be required to consult another regulator ahead of making a prohibition order in circumstances prescribed by HM Treasury through secondary legislation. If the appropriate regulator proposes to make a Part 18 prohibition order it must also give the individual to whom the prohibition order would apply a warning notice, which sets out the terms of the prohibition order. A warning notice is a notice issued by the appropriate regulator, in accordance with section 387 of FSMA 2000. If the regulator decides to make a Part 18 prohibition order, section 309C provides for a decision notice to be given to the individual to whom the prohibition order applies. A decision notice is a notice issued by the appropriate regulator, in accordance with section 388 of FSMA 2000. The decision notice must name the individual and, similarly to the warning notice, set out the terms of the Part 18 prohibition order. An individual subject to a Part 18 prohibition order has the right to refer the matter to the Tax and Chancery Chamber of the Upper Tribunal ("the Tribunal").
  5. Section 309D enables the appropriate regulator to vary or revoke a prohibition order if an individual named in the order applies for it to be revoked or varied. In circumstances prescribed by HM Treasury through secondary legislation, the appropriate regulator may be required to consult another regulator ahead of varying or revoking a prohibition order. Subsections (4) and (5) are self-explanatory.
  6. Section 309E provides that an individual is guilty of an offence, if they perform, or agree to perform, a function in breach of a Part 18 prohibition order, issued under section 309B. If convicted, an individual is liable to a fine. The fine could be potentially unlimited in England and Wales, while it should not exceed £5,000 in Scotland and Northern Ireland. There is a defence under subsection (3) for a person who can show that they took all reasonable precautions and exercised all due diligence to avoid committing the offence.
  7. Section 309F (1) provides that persons falling within section 309B (4) must take reasonable care to ensure that their functions are not performed by a person in breach of a Part 18 prohibition order. If a private person suffers a loss because a person falling within section 309B (4) has acted in breach of this duty, subsection (2) provides that they may bring an action for damages against them. Subsections (3) and (4) confer powers on HM Treasury, by regulations, to define a "private person" and to specify circumstances in which this section applies to a person other than a private person.
  8. Section 309G (1) requires relevant recognised bodies to take reasonable care not to allow persons, natural or corporate, to perform certain functions – described in these provisions as "designated senior management functions" - without the approval of the appropriate regulator. Subsection (2) provides that this duty applies where functions are performed under an arrangement entered into by the body itself (e.g., a contract of employment), or where they are performed under an arrangement entered into by its contractor. Subsection (3) provides that the functions which are "designated senior management functions" requiring approval are to be specified by the appropriate regulator’s rules. The regulator is able to specify a function as a "designated senior management" function if it falls within the description in subsections (4) to (6), which can be summarised as follows:
    1. The function will require the person performing it to be responsible for managing one or more aspects of the body’s affairs (including, for example, taking decisions, or participating in the taking of decisions, about how one or more aspects of a relevant recognised body’s affairs should be carried on); and
    2. Those aspects involve, or might involve, a risk of serious consequence for the relevant recognised body itself, or for business or other interests in the United Kingdom.
  9. Section 309H grants the appropriate regulator the power to make transitional provisions when making rules under section 309G (3). Subsection (2) enables HM Treasury to make any incidental, consequential, transitional, supplemental or saving provision it considers appropriate through secondary legislation, in connection with the regulators’ ability to make rules under section 309G (3).
  10. Section 309I requires an application for approval to be submitted to the appropriate regulator by the relevant recognised body concerned or, in the case of new firms awaiting recognition, a prospective recognised body, and must include a statement of the aspects of the applicant’s affairs that the person will be responsible for managing (known as a "statement of responsibilities"). The application must be made in the manner required by the appropriate regulator and must contain any information that the appropriate regulator may reasonably require. After the application is made, the appropriate regulator can require the applicant to request any additional information it needs to assess the application.
  11. Section 309J provides for the vetting of candidates by a relevant recognised body before it submits an application for approval to perform a designated senior management function. Section 309J (1) requires the relevant recognised body to be satisfied that a candidate is fit and proper to perform the functions in question before it is able to submit an application. Subsection (2) sets out matters that a recognised body must have regard to, among other things, when vetting candidates. These are whether the person has obtained specified qualifications, has undergone, or is undergoing specified training, possesses a specified competence, or has specified personal characteristics. These matters are all to be specified in rules made by the appropriate regulator. Subsection (4) provides that HM Treasury will specify in regulations the circumstances in which regulators are required to consult each other, ahead of making rules.
  12. Section 309K sets out the basis on which the relevant regulator is to assess the suitability of a candidate for approval. Subsection (1) requires the relevant regulator to be satisfied that a candidate is fit and proper to perform the functions in question before it is able to give its approval, or that this condition will be met if the application is granted subject to conditions. Subsection (3) sets out that the appropriate regulator may choose to grant a time-limited approval, or an approval subject to specific conditions, if it considers it desirable to do so in order to advance, in the case of the FCA, any of its operational objectives, and, in the case of the Bank, its Financial Stability Objective. Subsection (5) provides that HM Treasury can make regulations imposing consultation requirements on the appropriate regulator to be complied with ahead of granting an application.
  13. Section 309L requires the appropriate regulator to grant an approval within three months of receiving an application, or, if later, within the period within which a prospective recognised body’s application for recognition is to be determined. The three-month period is paused if the regulator requires the applicant to provide it with further information after the application is submitted. Subsection (5) provides that an applicant may withdraw an application by giving written notice to the appropriate regulator, but only with the consent of the person in relation to whom the application is being made (and the person by whom that person is retained, if not the applicant).
  14. Section 309M sets out the procedure for notifying interested parties of a regulator’s actual or proposed decision in relation to an application. If it proposes to refuse the application, or grant it for a time limited period or subject to conditions, it must give a warning notice to the interested parties. A warning notice is a notice issued by the appropriate regulator, in accordance with section 387 of FSMA 2000. This must be followed by a decision notice if it subsequently decides to refuse the application or grant it for a time limited period or subject to conditions. A decision notice is a notice issued by the appropriate regulator, in accordance with section 388 of FSMA 2000. Subsection (4) provides for an appeal to the Tribunal if an application is refused or granted for a limited time or subject to conditions.
  15. Section 309N requires the relevant recognised body to notify the appropriate regulator, and submit a revised statement of responsibilities, each time there is a change within the area of responsibility of a senior manager who has been approved by the appropriate regulator, which is worthy of notification to the regulator. A statement of responsibilities is a statement of the aspects of the relevant recognised body’s affairs that the senior manager is responsible for managing. The appropriate regulator has the power to make rules specifying when a change in a senior manager’s responsibilities is to be considered worthy of notification to the regulator (subsection 3), and to direct the form in which the relevant recognised body may be required to submit and verify information, when informing the regulator of such a change (subsection 4).
  16. Section 309O gives the appropriate regulator the power to withdraw the approval granted for the purposes of section 309G where it no longer considers that the person is a fit and proper person to carry out the functions for which they had been approved. It also requires the relevant recognised body to review senior managers’ fitness for approval at intervals specified by the appropriate regulator in its rules, and to notify the regulator if it considers there are grounds for withdrawal of approval.
  17. Section 309P sets out the procedure for withdrawing approval of a senior manager. Before making a decision to withdraw an approval given under section 309G, the appropriate regulator must comply with any consultation requirements that are prescribed in regulations made by HM Treasury and issue a warning notice to the interested parties, including the person in relation to whom the approval was given. This must be followed by a decision notice if the proposed decision is made. Subsection (3) provides for a right of appeal to the Tribunal.
  18. Section 309Q sets out that, if the appropriate regulator has granted a conditional or time-limited approval, the relevant recognised body to which the approval applies may request the appropriate regulator to vary or remove the condition or time limit, or impose a new condition. Subsections (3) and (4) set out that the appropriate regulator must decide whether to grant the application or give a warning notice within three months (or such other period prescribed by HM Treasury regulations). Subsections (5) and (6) provide that the appropriate regulator can refuse an application if it is desirable to do so in order to advance, for the FCA any of its operational objectives, and for the Bank its Financial Stability Objective.
  19. Section 309R provides that the appropriate regulator may choose to vary an approval on its own initiative if it considers it desirable to do so in order to advance a relevant objective, as defined in subsection (2). The approval may be varied by imposing, varying or removing a condition, limiting the period for approval, or varying or removing a time limit. Subsections (5) to (14) provide for the procedure to be followed when the appropriate regulator proposes to or decides to vary an application.
  20. Section 309S requires the appropriate regulator to issue a statement of its policy on the circumstances in which it will give a time-limited or conditional approval, and on the variation of an approval under sections 309Q and 309R. The statement of policy is required to be published in draft, which must specify a period within which members of the public may make representations. These must be considered by the appropriate regulator before the proposed statement is issued. The appropriate regulator is required to publish the statement, along with a summary of the representations received and any significant changes made since the statement was published in draft, in the best way to bring them to the attention of the public.
  21. Under section 309T, if a private person suffers a loss because a relevant recognised body has acted in breach of the duty under section 309G (1) (failing to take care to prevent a person carrying out certain functions without approval), they may bring an action for damages against the relevant recognised body. Subsections (2) and (3) confer powers on HM Treasury, by regulations, to define a "private person" and to specify circumstances in which this section applies to a person other than a private person.
  22. Section 309U provides that the appropriate regulator can impose a penalty, of such amount as the regulator considers appropriate, if a person has performed a designated senior management function without approval, and the person knows, or ought to have known, that they were doing so.
  23. Section 309V sets out the procedure for imposing penalties and is self-explanatory.
  24. Section 309W requires the appropriate regulator to issue a statement of its policy on the circumstances in which it will impose penalties under section 309U and the basis on which the level of penalties will be determined. The policy set out in the statement must cover the matters set out in subsection (2) to (4). Subsection (5) is self-explanatory. Subsection (6) requires the appropriate regulator to have regard to the statement in force at the time when the person performed a senior manager function without approval.
  25. Section 309X sets out the procedure for issuing a statement of policy under section 309W. Subsections (1) and (2) require the regulator to publish a draft of the statement of policy before it is issued, together with a notice stating that representations about the proposal may be made to the appropriate regulator within a specified period. The appropriate regulator is then required to publish the statement when it is issued, along with a summary of the representations received and any significant changes made since it was published in draft, in the best way to bring them to the attention of the public.
  26. Section 309Y establishes a certification regime for specified functions which are not subject to the senior managers’ approval regime in sections 309G to 309X. It requires relevant recognised bodies to take reasonable care not to allow employees, including contractors and secondees, to perform certain functions without having a valid certificate issued by the relevant recognised body. The functions requiring certification will be specified by the appropriate regulator’s rules. The regulator is only able to specify functions for this purpose if they are a "significant harm function" which is not a designated senior management function (as defined in s309G). Subsection (5) provides that a "significant harm function" is:
    1. a function which will require the person performing it to be involved in one or more aspects of the relevant recognised body’s affairs; and
    2. those aspects involve, or might involve, a risk of serious harm for the relevant recognised body itself, or for any of its users, or persons who have relevant rights or interests in its services. "Relevant rights or interests" are described in subsection (7).
  27. Section 309Z (1) provides that a relevant recognised body must not issue a certificate to a person in relation to a function specified under section 309Y unless it is satisfied that a person is fit and proper to perform that function. Subsection (2) sets out the matters that a relevant recognised body must have regard to, among other things, when assessing the suitability of someone to perform a function specified under section 309Y. These are whether the person has obtained a specified qualification, has undergone or is undergoing specified training, possesses a specified competence, or has specified personal characteristics (with all these matters being specified in rules made by the appropriate regulator). Subsection (4) provides that the certificate issued under this section must state that the body is satisfied that the individual is fit and proper to perform the function, and set out the aspects of the body’s affairs which the certified individual is involved in when performing the function to which the certificate relates. The certificate has a validity of twelve months. Where the relevant recognised body decides not to issue a certificate, subsection (6) requires it to give the person a notice in writing stating the reason for the decision, and next steps. Subsection (7) requires the relevant recognised body to keep a record of all employees who have a valid certificate.
  28. Section 309Z1 provides that the appropriate regulator may make rules about the conduct of approved senior managers, employees and directors of relevant recognised bodies. These rules are often referred to as "conduct rules". Rules under this section may include provision requiring a relevant recognised body to notify its employees of the conduct rules that apply to them, and to take the necessary steps to ensure that all employees understand the rules that apply in relation to them. They may also include provision requiring a relevant recognised body to notify the appropriate regulator if the body decides to take disciplinary action in relation to a person.
  29. Section 309Z2 gives the appropriate regulator a power to take disciplinary action for misconduct. Action can be taken if it appears to the appropriate regulator that the person is guilty of misconduct, and the appropriate regulator is satisfied that it is appropriate to take action against the person. Subsection (2) sets out what the appropriate regulator may do when it decides to take action under this section. The actions that a regulator may take are: publishing a statement of the person’s misconduct, imposing a monetary penalty or imposing a suspension, condition or limitation on an approval given under section 309G. Subsection (3) limits the length of a suspension, condition or limitation. Subsection (4) allows the appropriate regulator to withdraw or vary any such existing suspension, condition or limitation. Subsection (5) provides that action taken under this section must be within 6 years of the regulator finding out about the misconduct.
  30. Section 309Z3 sets out circumstances in which a person is guilty of misconduct for the purposes of section 309Z2.
  31. Section 309Z4 sets out the procedure to be followed when a regulator proposes to take disciplinary action under section 309Z2. Subsections (1) to (5) require a warning notice to be issued and detail what it must include. If the regulator subsequently decides to take action, it must issue a decision notice under subsection (6). Subsections (7) to (10) detail what must be stated in the decision notice in different circumstances. Subsection (11) provides for a right of appeal to the Tribunal against a decision to take disciplinary action. Subsection (12) requires the appropriate regulator to send a copy of the statement of a person’s misconduct to the person concerned, as well as anyone who was given a copy of the decision notice.
  32. Section 309Z5 requires the appropriate regulator to issue a statement of its policy on the circumstances in which it will impose penalties, suspensions, conditions or limitations under section 309Z2 and the basis on which the level of these sanctions will be determined for different types of misconduct. The policy set out in the statement must provide for the regulator to take into account the factors which are set out in subsection (2). Subsection (4) requires the appropriate regulator to have regard to any statement in force at the time of the misconduct when exercising, or deciding whether to exercise, its power under this section 309Z2.
  33. Section 309Z6 sets out the procedure for issuing a statement of policy under section 309Z5. Subsection (1) requires the appropriate regulator to publish the statement of policy in draft, with a notice stating that representations about the proposal may be made to the appropriate regulator. The appropriate regulator is required to consider representations before issuing the statement, and then to publish the statement, along with a summary of the representations made in accordance with subsection (2) and a description of significant changes since the statement was published in draft, in the best way to bring them to the attention of the public.
  34. Section 309Z7 defines a number of the terms used in this Chapter of the Act.
  35. Section 309Z8 grants HM Treasury the power to provide by regulations for the regime set out in this Chapter, or any part of it, to apply to registered credit rating agencies (CRAs), or to certain categories of CRA. Subsection (2) provides that the appropriate regulator, in relation to CRAs, must be the FCA. Subsection (3) provides that regulations made under this section can modify legislation.

Part 2 – Related amendments

  1. Part 2 of the Schedule makes amendments to FSMA 2000 in consequence of the provision being made in Part 1 of this Schedule.

Schedule 11: Central counterparties

Part 1 – Introductory

  1. Paragraph 1 sets out the main features of the special resolution regime for central counterparties (CCPs). The regime is intended to address a situation where all or part of the business of a CCP has encountered, or is likely to encounter, financial difficulties.
  2. This paragraph sets out the eight stabilisation options, and the three stabilisation powers which may be exercised to achieve the stabilisation options.
  3. The Bank and HM Treasury have significant roles in the operation of the special resolution regime, with more limited roles for the PRA and the FCA.

Part 2 – Pre-resolution powers of the Bank of England

Removal of impediments to the exercise of stabilisation powers etc.

  1. Paragraph 2 provides the powers the Bank will have to direct a CCP to take measures which address impediments to the effective exercise of the stabilisation powers. It is envisaged that these powers would be available for the Bank to use when performing its day-to-day functions of CCP supervisor and resolution authority, should such measures be necessary.
  2. Paragraph 2(2) outlines a non-exhaustive list of the powers the Bank could take to direct a CCP if required.
  3. Paragraph 2(3) outlines that, where a CCP is a subsidiary, the Bank may direct the parent company of the CCP to establish a holding company to facilitate the exercise of stabilisation powers, or to ensure the powers do not have an adverse effect on other entities in the group.
  4. Paragraph 2(4) outlines that the Bank must consult the relevant authorities and consider the impact on the CCP or entity in question, the financial markets and the financial stability of the UK before giving directions.
  5. Paragraph 2(6) outlines the form directions can or must take if being issued by the Bank.
  6. Paragraph 2(7) clarifies that nothing in this section limits the powers of the Bank under section 296A of, or paragraph 9B of Schedule 17A to, FSMA 2000.

Safeguards relating to directions under paragraph 2

  1. Paragraph 3 outlines the various safeguards relating to any directions given under paragraph 2, noting (but not limited to) the rights of the CCP to make representations and requirements for the Bank, including a requirement for the Bank to accompany any direction with a notice stating its reasons for exercising the power.

Part 3 – Resolution plans

  1. Paragraph 4(1) outlines that HM Treasury may, by regulations, make provisions for the purpose of ensuring that the Bank creates and maintains a resolution plan for each CCP under its jurisdiction. Examples of provisions that could be created by these regulations are provided in paragraph 4(2), whilst paragraph 4(3) outlines that regulations may also provide for exemptions

Part 4 – Removal of directors and senior managers

Removal of directors and senior managers

  1. Paragraph 5 outlines the Bank’s power to require the CCP to remove directors and senior managers if the conditions in paragraphs 7(1) and (2) are met. It is envisaged that this power would be used in instances where the Bank has not yet exercised the stabilisation powers.

Temporary manager

  1. Paragraph 6 outlines that the Bank may appoint a person or more than one person to act as a temporary manager of the CCP, either replacing or working with the directors of a CCP, and that the temporary manager will have the functions specified in paragraph 9. Paragraph 6(7) outlines the powers of instruction the Bank could utilise if the temporary manager is being appointed to work with the directors.
  2. Sub-paragraphs (4) to (6) outline the functions and powers of the temporary manager that may be specified under paragraph 9.

Paragraphs 5 and 6: conditions

  1. Paragraph 7 outlines the conditions that would have to be met for the powers in paragraph 5 and 6 to be exercised. Namely, that there is a significant deterioration in the financial situation of a CCP, a serious infringement by the CCP of a relevant requirement or its rules, or if director of a CCP meets the conditions in paragraph 7(5). Paragraph 7(6) defines a relevant requirement as one imposed by or under FSMA 2000, the European Market Infrastructure Regulation (EMIR), as onshored in UK law, or another enactment specified in regulations made by HM Treasury.
  2. Paragraph 7(2) clarifies that the conditions are met if it’s not reasonably likely that a measure taken by the Bank under its powers in section 296 or 296A of FSMA 2000 or paragraph 13 of this Schedule would reverse a financial deterioration or bring an infringement to an end.

Temporary manager: further provisions in relation to the appointment

  1. Paragraph 8(1) clarifies that the Bank must be satisfied the temporary manager has the relevant experience and qualifications necessary to perform the role and has no conflicts of interest.
  2. Sub-paragraphs (2) to (4) outline that the Bank may not appoint a temporary manager for longer than a year, may vary the terms of the appointment (and remove the temporary manager) at any point, and clarifies the limitations of what the temporary manager will be liable for.

Temporary manager: instrument of appointment

  1. Paragraph 9 clarifies that the power to appoint a temporary manager must be exercised by an instrument of appointment, which must be published if the conditions specified in sub-paragraph (7) are met.
  2. Sub-paragraphs (2), (5) and (6) outline the details and provisions that the instrument of appointment must or may contain, whilst sub-paragraphs (3) and (4) outline the requirements the Bank may place on the temporary manager.

Right to refer matters to the Tribunal

  1. Paragraph 10 outlines the rights of a CCP, director, or senior manager (or former director or senior manager) who is aggrieved by the exercise of powers within paragraphs 5 or 6 to refer the matter to the Tribunal.

Removal of directors and senior managers and appointment of temporary manager: procedure

  1. Paragraph 11(1) outlines that the powers to remove directors or appoint a temporary manager may take effect immediately, or at a specified date.
  2. Sub-paragraphs (2) and (3) specify that the Bank must give written notice to the CCP, and in some cases the directors and senior managers to whom the requirement relates when exercising the powers mentioned in paragraphs 5 or 6, or in cases where representations have been made and the Bank does or does not change their approach in light of this.

Removal of directors and senior managers and appointment of temporary manager: notice requirements

  1. Paragraph 12 outlines requirements for the contents of any written notice which is provided under paragraph 11.

Temporary restriction on remuneration

  1. Paragraph 13 describes the powers the Bank will have to direct a CCP to restrict or prohibit discretionary payments to specific employees or shareholders of a CCP for a specified time. These include equity remuneration, dividend payments, share buy-backs, bonuses and severance payments, where these payments are not obligations imposed under a contract. The Bank can only exercise this power when it has not yet exercised any stabilisation powers.
  2. Sub-paragraphs (2) to (4) outline the conditions that must be met for this power to be exercised.
  3. Sub-paragraphs (5) to (8) require that the Bank must publish a statement of policy, and that no directions may be under this section before the statement of policy has been published.
  4. Sub-paragraph (9) outlines that the specified time for use of this power must not exceed 5 years, and sub-paragraph (10) clarifies that a direction must be given in writing and can be varied or revoked.

Restriction on remuneration: review and revocation

  1. Paragraph 14 applies where a direction has been given under paragraph 13 in relation to a CCP, noting that the Bank must review whether the requirements are still met for the power to be exercised every 3 months, and revoke the direction immediately if they are not.
  2. The direction also ceases to have effect if a stabilisation power is exercised.

Part 5 – Special resolution action

Special resolution objectives

  1. Paragraph 15 sets out the five special resolution objectives, which the Bank must have regard to in using (or considering using) the stabilisation powers.
  2. With no order of priority these objectives are:
    1. To protect and enhance the stability of the financial system of the UK (by preventing contagion and maintaining market discipline);
    2. To protect and enhance public confidence in the stability of the financial system of the UK;
    3. To maintain the continuity of clearing services;
    4. To protect public funds;
    5. To avoid interfering with property rights in contravention of a Convention right (the meaning of which is in the Human Rights Act 1998).

Code of Practice

  1. Paragraph 16 specifies that HM Treasury must issue a code of practice about the use of stabilisation powers, which the Bank must have regard to.
  2. Paragraph 16(2) outlines what the code may provide guidance on. This includes, amongst other things, how the special resolution objectives should be interpreted, how decisions over which stabilisation powers to exercise are expected to be made, and compensation arrangements including the methodology for calculating how much compensation may be owed to persons left financially worse off where stabilisation options are exercised.
  3. Paragraph 16 also clarifies that HM Treasury must consult the Bank, the FCA and the PRA before issuing the code, and must lay a copy before Parliament as soon as reasonably practicable after issuing it.

General conditions

  1. Paragraph 17 outlines the conditions that must be met for a stabilisation power to be exercised.
  2. There are four conditions which are not in order of priority:
    1. Condition 1: The CCP is failing or likely to fail (within the meaning given in sub-paragraph (6));
    2. Condition 2: It is not reasonably likely that (ignoring the stabilisation powers) action will be taken which means the CCP is not likely to fail, or actions undertaken by the CCP to prevent failure might have an adverse impact the stability of the financial system of the UK;
    3. Condition 3: The exercise of the power is necessary having regard to the public interest, in the advancement of one or more of the special resolution objectives;
    4. Condition 4: One of more of the special resolution objectives would not be met to the same extent by the winding up of the CCP.
  3. Paragraph 17(10) clarifies that the Bank must consult the FCA and Treasury (and in some cases the PRA) before determining if conditions 2, 3 and 4 are met.

Effect on other group members

  1. Paragraph 18 outlines that, if the CCP is a member of a group, the Bank must have regard to the need to minimise the effect of the power on other undertakings of the same group, and the effect of the power on the financial stability of third countries.

Specific conditions: financial assistance cases

  1. Paragraph 19 sets out the conditions that must be met before the Bank exercises the stabilisation powers outlined in paragraphs 27, 29 and 30, where HM Treasury has notified the Bank that they have provided financial assistance in respect of a CCP, for the purpose of resolving or reducing a serious threat to the stability of the financial system of the UK.

Resolution liaison panel

  1. Paragraph 20 sets out the arrangements HM Treasury must make for a panel to advise HM Treasury about the effect of the special resolution regime for CCPs on the financial services industry and financial markets. In particular it clarifies what the panel may advise on and the membership of the panel.

Restrictions on use of certain resolution powers

  1. Paragraph 21 outlines restrictions on certain resolution powers; specifically, for the first stabilisation option (private sector purchaser), where the Bank may only exercise resolution powers in relation to a residual CCP; and the third stabilisation option (transfer of ownership), where the Bank may only exercise resolution powers where the transferee is the Bank, a company owned the Bank or HM Treasury, or a nominee of HM Treasury.

Pre-resolution valuation

  1. Paragraph 22 sets out that before the bank exercises any stabilisation power, it must ensure that the assets and liabilities of a CCP are valued by an independent valuer (unless urgency dictates that the Bank must carry out a provisional valuation instead).
  2. Sub-paragraph (4) provides that the Bank may carry out a provisional valuation if urgency dictates it is necessary.
  3. Sub-paragraph (5) clarifies what a person conducting a valuation is obligated to consider, and sub-paragraphs (7) and (8) set out the products that a valuation must or may be accompanied by, though if a provisional valuation is being carried out the Bank need only comply with sub-paragraph (7) as far as it is reasonable to do so in the circumstances (sub-paragraph (9)).
  4. Sub-paragraph (10) outlines that HM Treasury may by regulations specify the methodology for a valuation.

Replacement of Bank’s provision valuation

  1. Paragraph 23 provides that if the Bank has carried out a provisional valuation under paragraph 22(4), the Bank must arrange for a full valuation to be carried out by an independent valuer as soon as is reasonably practicable, for the purposes outlined in sub-paragraph (2).
  2. The valuation under paragraph 23 must adhere to the same requirements as in paragraph 22(5) and (7)).

Independent valuer: valuation under paragraph 22 or 23

  1. Paragraph 24 provides that the Bank must appoint a person to act as an independent valuer for the purposes outlined under paragraph 22 and 23. Sub-paragraph (2) explains that the Bank may require the CCP to reimburse the Bank for costs it incurs in relation to the valuer.
  2. Sub-paragraph (3) notes that an independent valuer must satisfy certain requirements in order to be appointed, whilst sub-paragraphs (4), (5) and (6) provide for the duration in which a valuer may hold office, the grounds on which a valuer may be removed from office, and the actions the Bank must take upon the death, resignation or removal from office of an independent valuer respectively.

Independent valuer: supplemental

  1. Paragraph 25 outlines that the independent valuer may do anything necessary or desirable for the purposes of their valuation (sub-paragraph (1)), including appointing staff (sub-paragraph (4)), and HM Treasury may make regulations to confer specific functions on valuers or make provisions for procedure to be followed, as outlined in sub-paragraphs (2), (3), and (5).
  2. Sub-paragraph (6) notes that independent valuers and their staff are not civil servants, nor servants or agents of the crown, and sub-paragraph (7) notes that records of an independent valuer are public records (for the purposes of the Public Records Act 1958).

Consequences of a replacement valuation

  1. Paragraph 26 provides that, where an independent valuation produces a higher valuation of the net asset value of the CCP than a provisional valuation, the Bank may modify and liability of the CCP which has been reduced, deferred or cancelled by a write-down instrument, to reinstate that liability. They may also instruct a bridge CCP to pay additional considerations to the persons outlined in sub-paragraph (1)(b).This is subject to certain conditions, outlined in sub-paragraph (2).

Private sector purchaser

  1. Paragraph 27 sets out the first stabilisation option (private sector purchaser), which allows the Bank to sell all or part of the business of a CCP to a commercial purchaser.
  2. Sub-paragraph (2) provides that this transfer may be effected through either a transfer of the CCP’s shares and other securities, or some or all of its property, rights and liabilities. Both types of transfer are executed by instruments made by the Bank (a share transfer instrument or a property transfer instrument).

Private sector purchaser: marketing

  1. Paragraph 28 sets out that if utilising the private sector purchaser option, the Bank must make arrangements for marketing any parts of the businesses sold through the share transfer or property transfer instruments (unless this would undermine one or more of the special resolution objectives (sub-paragraphs (4) and (5)).
  2. Arrangements are subject to certain criteria, outlined in sub-paragraphs (2) and (3).

Bridge central counterparty

  1. Paragraph 29 sets out the second stabilisation option (bridge central counterparty). It allows the Bank to transfer all or part of the business of a CCP to a company which is a) wholly or partially owned by the Bank, is b) controlled by the Bank, and is c) created for the purposes of receiving a transfer by virtue of this paragraph. The option is designed to facilitate a temporary arrangement in order to maintain access to critical clearing services, with the view to eventually selling the CCP or its business. The Bank can make one or more property or share transfer instrument(s) for this purpose.
  2. Sub-paragraphs (4) and (5) set out the provisions that must be included in the code of practice referred to in paragraph 16, and the situations in which the Bank must take necessary steps to wind up the bridge CCP.
  3. Sub-paragraphs (9) and (10) set out circumstances pertaining to an "onward bridge central counterparty", whereby the business of a CCP first transferred by a property transfer instrument is later transferred to another company wholly owned by the Bank.

Transfer of ownership

  1. Paragraph 30 sets out that third stabilisation option is to transfer ownership of the CCP to any person, for which the Bank may make one or more share transfer instruments. It is designed to allow the Bank to transfer the ownership of the CCP to a person other than a commercial purchaser or into a Bank-owned bridge company.

Tear-up power

  1. Paragraph 31 sets out the fourth stabilisation option (to make one or more tear-up instruments for the purpose of ensuring the CCP has a matched book). This would involve the Bank terminating all or part of any contracts held by the CCP with its clearing members, allowing the Bank to rebalance the CCP’s finances.
  2. Sub-paragraph (4) sets out that the Bank must either a) require a CCP to make a commercially reasonable payment to a clearing member who is a party to a contract being terminated, or b) require the clearing member who is a party to the contract to make a commercially reasonable payment to the CCP. Sub-paragraph (5) requires the Bank to publish a statement of policy within 12 months of the power coming into force as to how it determines what a commercially reasonable payment is.
  3. Sub-paragraph (8) defines a matched book.

Cash call power

  1. Paragraph 32 out the fifth stabilisation option (to make one or more cash-call instruments). This power allows the Bank to require clearing members of the CCP to pay a specified amount in cash to the CCP, in order to absorb losses and recapitalise the CCP.
  2. Sub-paragraph (3) states that HM Treasury may make regulations to determine the maximum cash amount that clearing members can be required to contribute, and specify circumstances in which the Bank may require a CCP to use specified funds of specified clearing members. It is the government’s intention in the near-term to use this power to set specific maximum cash limits, specifically two times a clearing member’s default fund contribution (for default losses) and three times a clearing member’s default fund contribution (for non-default losses).
  3. This power will not apply to certain clearing members, as clarified in sub-paragraph (4).

Power to reduce variation margin payments

  1. Paragraph 33 sets out the sixth stabilisation option (power to cancel or reduce variation margin payments). This power allows the Bank to cancel or reduce a variation margin payment (as defined in sub-paragraph (5)) that a CCP would have otherwise paid to a clearing member.
  2. Sub-paragraph (3) specifies that this power can only be used to recover losses incurred as a result of a clearing member defaulting and will not apply to the clearing members outlined in sub-paragraph (4).

Write-down power

  1. Paragraph 34 outlines the seventh stabilisation option (to make one or more write-down instruments). This power allows the Bank to cancel, modify or change the form of an unsecured liability which is owed by the CCP.
  2. Sub-paragraph (3) specifies that this power can only be used to recover losses incurred as a result of anything other than a clearing member defaulting. This power may also not be exercised for a number of liabilities, outlined in sub-paragraph (4), and HM Treasury will have power to make regulations to add to/amend this list of excluded liabilities.

Powers in relation to securities

  1. Paragraph 35 sets out the interaction of the write-down power with securities, and provides that a write-down instrument may cancel, transfer, dilute, modify or convert any securities (as defined in sub-paragraph (2)).
  2. Sub-paragraph (3) further outlines what a write-down instrument may provide for, including provision with respect to rights attaching to securities issued by the CCP and providing for the listing of securities issued by the CCP to be discontinued or suspended. Further details are provided in sub-paragraphs (5), (6) and (7).
  3. Sub-paragraph (8) clarifies the interaction with FSMA 2000, whilst sub-paragraph (9) clarifies that any provision made under this paragraph is in addition to any powers in paragraph 34.

Report on provisions in write-down instrument

  1. Paragraph 36 applies to a relevant provision in a write-down instrument as referred to in para 34(2), and provides that the Bank must report to the Chancellor stating reasons why that provision has been made in the case of the liabilities concerned and the reasons for any deviation from normal certain specified insolvency treatment principles. The Chancellor must lay a copy of this report before Parliament.

Priority between creditors

  1. Paragraph 37 permits HM Treasury to make regulations to specify matters to which the Bank must have regard in making a write-down instrument to ensure that the treatment of liabilities in a write down instrument align to an appropriate degree with how liabilities should be treated under insolvency proceedings. This will ensure the effective use of the write down power in paragraph 34. The power corresponds with the provisions in paragraph 36 where the Bank has taken action that deviate from normal insolvency treatment principles.

Power to take control

  1. Paragraph 38 outlines the eighth stabilisation option (to make one or more instruments of control). An instrument of control allows for any voting rights of shareholders or members and specified powers of directors and senior managers of the CCP to be transferred to the Bank for a specified time. The power will thus enable the Bank to assume control of a failing CCP quickly in order to stabilise it and restore it to viability.

Shadow directors etc

  1. Paragraph 39 applies where the Bank has used one or more stabilisation options mentioned in paragraph 1(3) unless the CCP has ceased to be subject to the exercise of any stabilisation power mentioned in paragraph 1(4), and clarifies that relevant persons (e.g. the Bank, someone working for or acting for the Bank, or a temporary manager appointed under paragraph 6) are not to be treated as a shadow director of a CCP, or a director or someone who discharges managerial responsibilities for the purposes of the relevant enactments.

Interpretation: "securities"

  1. Paragraph 40 defines "securities" for the purpose of this Schedule and in particular the use of share transfer instruments, as per paragraph 41.

Share transfer instrument

  1. Paragraph 41 defines a "share transfer instrument". It is an instrument which provides for securities issued by a CCP to be transferred, or makes other provision for the transfer of securities issued by a CCP. This enables the operation of stabilisation options involving a transfer of shares set out at paragraphs 27, 29 and 30.

Effect

  1. Paragraph 42 outlines that a ‘transfer’ (a transfer provided for by a share transfer instrument) takes effect despite any restrictions arising from contracts or legislation (sub-paragraph (3)), and can take effect free from any trust, liability or other encumbrance (sub-paragraph (5)). It can also extinguish any rights to acquire securities arising from shares, stock or debentures (sub-paragraph (6)).

Continuity

  1. Paragraph 43 states that when a share transfer instrument is made, provision can be made to ensure the continuity of arrangements operating in respect of a CCP.
  2. Sub-paragraph (1) enables the share transfer instrument to include provision that the transferee can be treated as the same person as the transferor for any purpose connected with the transfer.
  3. Sub-paragraph (2) enables the share transfer instrument to include provision that agreements made or other things done by or in relation to a transferor are treated as made or done by or in relation to the transferee. This provision would enable for example, the transferred CCP to continue to benefit from arrangements entered into by the transferors, notwithstanding any rights triggered on the transfer.
  4. Sub-paragraph (3) allows for transitional provision about things transferred to be continued. This can include continuation of legal proceedings by or in relation to the transferee. Sub-paragraph (4) allows for the modification of references to the transferor in instruments or documents. Sub-paragraph (5) allows for provision of information to be required or permitted between the transferor and the transferee of a share transfer instrument or order.

Conversion and delisting

  1. Paragraph 44 outlines that a share transfer instrument may provide for securities (as previously defined), to be converted from one form or class to another (sub-paragraph (1)) – and may also provide for the listing of securities to be discontinued or suspended (sub-paragraph (2)). Sub-paragraph (3) explains that where the listing of securities is suspended by a share transfer instrument, those securities are to be treated as still being listed for specific purposes.

Directors and senior managers

  1. Paragraph 45 outlines that a share transfer instrument may be used to remove, appoint, and amend the service contract of a director or senior manager of a CCP.
  2. Sub-paragraph (2) clarifies that this also applies to directors or senior managers of any undertaking which is a CCP group company, in respect of a specified CCP. Sub-paragraph (4) explains that any appointments are to be on terms and conditions agreed with the Bank, whilst sub-paragraph (3) defines ‘relevant CCP group company’.

Ancillary instruments: production, registration, etc

  1. Paragraph 46 makes various provisions for share transfer instruments to take effect irrespective of the lack of completion of formalities. It provides that the transfer has effect irrespective of production, delivery, transfer or other dealing with an instrument and irrespective of registration.

Incidental provision

  1. Paragraph 47 outlines that a share transfer instrument may include incidental, consequential or transitional provision (e.g., provision for different purposes, cases or circumstances).

Procedure: instruments

  1. Paragraph 48 outlines the procedure that the Bank must follow in making a share transfer instrument. It describes the persons that the Bank must send a copy of the share transfer instrument to (sub-paragraph (1)), and where the Bank must publish a copy (sub-paragraph (2)). HM Treasury must also lay a copy before Parliament (sub- paragraph (3)).

Supplemental instruments

  1. Paragraph 49 outlines that where the Bank has made a share transfer instrument, they may also make one or more supplemental share transfer instruments (sub-paragraph (2)). This can provide for the transfer of securities which were issued by the CCP before the original instrument, and have not been transferred by the original instrument (or another supplementary instrument), or makes provisions of the kind that a share instrument may make under paragraph 41, sub-paragraph (1)(b)).
  2. The general and specific conditions (paragraphs 17 and 19) do not apply to a supplemental instrument. Sub-paragraph (5) outlines who the Bank must consult before making a supplemental share instrument, and sub-paragraph (7) outlines that paragraph 48 also applies for a supplemental share instrument.

Onward transfer

  1. Where the Bank has made a share transfer instrument, it may then make onward share transfer instruments.
  2. These may provide for two things: first, for the transfer of securities meeting the description specified in paragraph 50(3)(a); and, second, for any provision in relation to the relevant securities.
  3. Paragraph 50(4) stipulates that the transferee may not be the transferor under the original order, and the Bank may not make an onward share transfer unless the transferee falls into the conditions outlined in paragraph 50(5).
  4. The general and specific conditions (paragraph 17 and 19) do not apply to an onwards transfer. Paragraph 50(7) provides that the Bank must consult the FCA, and the PRA if the CCP is authorised by the PRA.
  5. Paragraph 48 applies where the Bank has made an onward share transfer instrument.

Reverse share transfer

  1. Where the Bank has made a share transfer instrument, it may make reverse share transfer instruments.
  2. A reverse share transfer instrument may transfer securities back to original transferors (e.g the holders of the shares and other securities before Bank intervention). Where there has been an onward share transfer, the order may transfer securities back from that onward transferee. The three conditions defining a reverse share transfer instrument are outlined in paragraph 51(4).
  3. Sub-paragraphs 51(5) and (6) outline the conditions that must be met for a reverse share transfer instrument to be used (e.g. the onward transferee must be the Bank, a company owned by the Bank or HM Treasury, or a nominee of HM Treasury, or must be made with written consent of the onward transferee).
  4. The general and specific conditions (paragraph 17 and 19) do not apply to reverse share transfers. Paragraph 51(8) provides that the Bank must consult the FCA, and the PRA if the CCP is authorised by the PRA.
  5. Paragraph 48 applies where the Bank has made a reverse share transfer instrument.

Bridge central counterparties: share transfers

  1. Where the Bank has made a property transfer instrument to effect the bridge CCP option, it may make bridge CCP share transfer instruments.
  2. These instruments provide for securities issued by the bridge CCP to be transferred and for other provision to be made in relation to the securities of the bridge CCP. Thus the Bank of England may transfer the securities of a bridge CCP.
  3. The general and specific conditions (paragraph 17 and 19) do not apply to transfers under paragraph 52. Paragraph 52(5) provides that the Bank must consult the FCA, and the PRA if the CCP is authorised by the PRA.
  4. Paragraph 48 applies where the Bank has made a transfer under paragraph 52.

Bridge central counterparties: reverse share transfers

  1. Where the Bank has made a bridge CCP share transfer instrument, it may make one or more bridge CCP reverse share transfer instruments, as long as the transferee under the original instrument fulfils the criteria outlined in paragraph 53(4).
  2. A bridge CCP reverse share transfer instrument provides for securities to be transferred back to the transferor under the original instrument, as outlined in paragraph 53(3).
  3. The general and specific conditions (paragraph 17 and 19) do not apply to transfers made under paragraph 53. Paragraph 53(6) provides that the Bank must consult the FCA, and the PRA if the CCP is authorised by the PRA.
  4. Paragraph 48 applies where the Bank has made instrument under paragraph 53.

Property transfer instruments

  1. Paragraph 54 provides that property transfer instruments may be made by the Bank of England to effect a transfer of a CCP’s property, rights or liabilities. It describes the provision that a property transfer instrument may make. The instrument may transfer some or all of the property, rights or liabilities of a specified CCP. The instrument may relate to specified combinations of the specified CCP's property, rights or liabilities.

Effect

  1. Paragraph 55 sets out that a transfer of property, rights or liabilities is effected through a property transfer instrument (paragraph 54). Sub-paragraphs (3) and (4) make provision for the transfer to take effect regardless of any legislative or contractual restriction, including requirements for consent (or any other restrictions which might render property not transferable).

Transferable property

  1. Paragraph 56 makes provision for a property transfer instrument to transfer any property, rights or liabilities. Such property, rights and liabilities are expressed to include those acquired or arising between the making of the instrument and the transfer date, and any rights and liabilities arising on or after the transfer date in respect of matters occurring before that date. Sub-paragraphs (c) and (d) provide that foreign property may be transferred. Sub-paragraph (e) provides that rights and liabilities under enactments may be the subject of a transfer.

Continuity

  1. Paragraph 57 states that, when a property transfer instrument is made, provision can be made to ensure the continuity of arrangements operating in respect of a CCP.
  2. Sub-paragraph (1) enables the property transfer instrument to include provision that the transferee can be treated as the same person as the transferor for any purpose connected with the transfer and for the transfer to be treated as a succession.
  3. Sub-paragraph (2) enables the property transfer instrument to include provision that agreements made or other things done by or in relation to a transferor are treated as made or done by or in relation to the transferee. This provision would enable, for example, the CCP to continue to benefit from arrangements entered into by the transferor, notwithstanding any rights triggered on the transfer.
  4. Sub-paragraph (3) provides that anything related to things that have been transferred under the instrument, which are already in the process of being done by or to the transferor immediately before the transfer can be continued in relation to the transferee. This can include continuation of legal proceedings by or in relation to the transferee.
  5. Sub-paragraph (4) allows for provision to be included in a property transfer instrument about continuity of employment.
  6. Sub-paragraph (5) allows for the modification of references to the transferor in instruments or document.
  7. Sub-paragraph (6) provides that in so far as rights and liabilities in respect of anything transferred are enforceable after a transfer date, a property transfer instrument can apportion them as between the transferor and the transferee.
  8. Sub-paragraph (7) provides that the transferor and the transferee may, by agreement, modify a provision of the instrument. Such a modification must achieve a result that could have been achieved by the instrument, and may not transfer (or arrange the transfer of) property rights or liabilities.
  9. Sub-paragraph (8) allows for provision of information and assistance to be required or permitted between the transferor and the transferee under a property transfer instrument.

Directors and senior managers

  1. Paragraph 58 allows the Bank, through a property transfer instrument, to take various actions with regard to directors and senior managers of CCPs or relevant CCP group company in respect of a CCP, including appointment and removal, termination and variation of service contracts.
  2. Sub-paragraph (4) clarifies that appointments are to be made on terms and conditions agreed by the Bank, whilst sub-paragraph (3) defines ‘relevant CCP group company’.

Recognised central counterparty rules

  1. Paragraph 59 states that a property transfer instrument made by the Bank may also include provision regarding the consequences of a transfer for the rules of a CCP. Sub-paragraph (2) provides that an instrument may modify or amend the rules of a CCP (or the part of the CCP that either has or has not been transferred).

Recognised central counterparty membership

  1. Paragraph 60 outlines that a property transfer instrument may make provision about the consequences of a transfer for membership of a CCP. Namely, an instrument may make provision which modifies the terms on which a person is a clearing member of a CCP, and where there has been a partial transfer provide for a person to remain a member of the transferor whilst also becoming a member of the transferee.

Licenses

  1. Paragraph 61 makes provision in relation to licenses. Sub-paragraph (1) provides that a licence in respect of property transferred by property instrument shall continue to have effect notwithstanding the transfer. Sub-paragraph (2) provides that the Bank may disapply sub-paragraph (1), so that a licence may be discontinued. Sub-paragraph (3) specifies that where a licence imposes rights or obligations, a property transfer instrument may apportion responsibility for exercise or compliances between the transferor and transferee.

Foreign property

  1. Paragraph 62 describes how a property transfer instrument may make provision for the transfer of property situated outside the United Kingdom and rights and liabilities governed by foreign law.
  2. Sub-paragraph (3) states that both the transferor and the transferee must take any necessary steps to ensure that the transfer is effective as a matter of foreign law.
  3. Sub-paragraph (4) makes provision for what the transferor must do in the period before a transfer is fully effective as a matter of foreign law. For this period, the transferor must act on behalf of the transferee by holding any property or right for its benefit or discharging any liability on its behalf. This is unless the Bank determines that it will not be possible for the transfer of property to be effective under the jurisdiction it occurs in (subsection (5)).
  4. Sub-paragraph (7) outlines that the transferor must meet any expenses of the transferee in complying with this provision.
  5. Sub-paragraphs (8) and (9) relate to obligations imposed by the operation of this paragraph. Such obligations are enforceable as contracts and the Bank of England may give directions in relation to those obligations, with which the transferor must comply.

Incidental provision

  1. Paragraph 63 provides for a property transfer instrument to include incidental, consequential or transitional provision. Such provision may be made generally or for a specified purpose or purposes.

Procedure

  1. Paragraph 64 outlines the procedural requirements for a property transfer instrument. It requires the Bank of England to send a copy of a property transfer instrument, as soon as reasonably practicable, to the affected CCP, HM Treasury, the FCA, the PRA (if the CCP is a PRA-authorised person) and any other persons specified in the code of practice.
  2. The Bank of England must also publish the property transfer instrument in line with the provisions of sub-paragraph (2). HM Treasury is also required to lay a copy of the transfer instrument before Parliament (sub-paragraph (3)).

Property transfer instrument: delisting

  1. Paragraph 65 explains that a property transfer instrument may provide for the listing of securities to be discontinued or suspended. Where they are suspended, the securities are to be treated for the purposes of the relevant provisions in FSMA 2000 (outlined in sub-paragraph (2)) as still being listed.

Transfer of property subsequent to resolution instrument

  1. Paragraph 66 states that, where the Bank has made a resolution instrument, the Bank may make one or more property transfer instruments in respect of property, rights or liabilities of the CCP.
  2. Sub-paragraph (3) notes that paragraph 17 does not apply to a property transfer instrument under sub-paragraph (2), whilst sub-paragraph (4) notes that the Bank must consult the FCA, HM Treasury, and the PRA if the CCP is a PRA-authorised person.

Supplemental instruments

  1. Paragraph 67 states that, where the Bank of England has made a property transfer instrument in accordance with either the private sector purchaser or the bridge CCP options, it may make additional supplemental property transfer instruments. These may, among others, provide for two things: first, for property, rights and liabilities to be transferred from the original transferor; and, second, for anything that a property transfer instrument may otherwise provide for.
  2. Sub-paragraph (4) provides that the general and specific conditions (paragraph 17 and 19, respectively) do not apply to supplemental transfers.
  3. Sub-paragraph (5) provides that the Bank of England must consult the FCA, HM Treasury, and, if the CCP is a PRA-authorised person) the PRA, before making the instrument.
  4. Making a supplementary property transfer instrument will not prejudice the possibility of making a new instrument under paragraph 27 or 29.
  5. The procedure outlined under paragraph 64 will also apply if a supplemental property transfer instrument is made.

Private sector purchaser: reverse property transfer

  1. Paragraph 68 sets out that, where the Bank of England has made a property transfer instrument in accordance with the private sector purchaser option it may make reverse property transfer instruments.
  2. A reverse property transfer instrument may transfer property, rights or liabilities of a private sector purchaser back to the original transferor, or make other provision in connection with the transfer of property, rights or liabilities that are, could be, or could have been transferred.
  3. Sub-paragraph (4) provides that the Bank must obtain the written consent of the original transferee before making a private sector reverse property transfer instrument.
  4. Sub-paragraph (5) provides that the general and specific conditions (paragraph 17 and 19, respectively) do not apply to instruments made under paragraph 68.
  5. Sub-paragraph (6) provides that the Bank of England must consult the FCA, HM Treasury, and (if the CCP is a PRA-authorised person) the PRA, before making the instrument.
  6. The procedure outlined under paragraph 64 will also apply if a transfer instrument is made under this paragraph.

Onward transfer

  1. Paragraph 69 sets out that, where the Bank has made a property transfer instrument in respect of a bridge CCP, the Bank may make one or more onward property transfer instruments. This provides that property rights or liabilities of the bridge CCP may be transferred, or the Bank make other provision in connection with the transfer of property, rights or liabilities of the bridge CCP. This applies to property, rights and liabilities of the bridge CCP whether or not they were transferred under the original instrument.
  2. Sub-paragraph (5) provides that the onward property transfer may not transfer property, rights, or liabilities to the original transferor.
  3. Sub-paragraph (6) provides that the general and specific conditions (paragraph 17 and 19, respectively) do not apply to an instrument made under paragraph 69.
  4. Sub-paragraph (7) provides that the Bank of England must consult the FCA, HM Treasury, and (if the CCP is a PRA-authorised person) the PRA, before making the instrument.
  5. The procedure outlined under paragraph 64 will also apply if an instrument is made under this paragraph.

Bridge central counterparties: reverse property transfer

  1. Paragraph 70 sets out that, where the Bank has made a property transfer instrument providing for the transfer of property, rights or liabilities to a bridge CCP, they may make one or more bridge CCP reverse property transfer instruments. If the Bank makes an onward property transfer instruments under paragraph 69, they may make one or more reverse property transfer instruments in respect of property rights or liabilities of the onward transferee.
  2. The Bank may not make a bridge CCP reverse property transfer instrument unless the conditions in sub-paragraph (5) are met.
  3. Sub-paragraph (6) provides that the general and specific conditions (paragraph 17 and 19, respectively) do not apply to instruments made under paragraph 70.
  4. Sub-paragraph (7) provides that the Bank of England must consult the FCA, HM Treasury, and (if the CCP is a PRA-authorised person) the PRA, before making the instrument.
  5. The procedure outlined under paragraph 64 will also apply if an instrument is made under this paragraph.

Transfer of ownership: property transfer

  1. Paragraph 71 sets out that, where the Bank has made a share transfer instrument in respect of paragraph 30 (transfer of ownership) or paragraph 27, the Bank may make one or more property transfer instruments. A property transfer instrument is defined in sub-paragraph (3), and sub-paragraph (4) notes that the Bank may not make a property transfer instrument under this paragraph unless the original instrument transferred securities to the Bank, a company wholly owned by the Bank or HM Treasury, or a nominee of HM Treasury.
  2. Sub-paragraph (5) provides that the general and specific conditions (paragraph 17 and 19, respectively) do not apply to a property instrument made under paragraph 71.
  3. Sub-paragraph (6) provides that the Bank of England must consult the FCA, and (if the CCP is a PRA-authorised person) the PRA, before making the instrument.
  4. The procedure outlined under paragraph 64 will also apply if an instrument is made under this paragraph.

Transfer of ownership: reverse property transfer

  1. Paragraph 72 sets out that, where the Bank has made a property transfer instrument in accordance with paragraph 71, the Bank may make one or more reverse property transfer instruments in respect of the property rights and liabilities of the transferee under the original instrument. The reverse property transfer instrument is defined in sub-paragraph (3).
  2. Sub-paragraph (4) outlines the conditions that must be met for a reverse property transfer instrument to be used (e.g the transferee under the original instrument is the Bank, a company owned by the Bank or HM Treasury, or a nominee of HM Treasury, or must be made with written consent of the onward transferee).
  3. Sub-paragraph (5) provides that the general and specific conditions (section 17 and 19, respectively) do not apply to a property instrument made under paragraph 72.
  4. Sub-paragraph (6) provides that the Bank of England must consult the FCA, and (if the CCP is a PRA-authorised person) the PRA, before making the instrument.
  5. The procedure outlined under 64 will also apply if an instrument is made under this paragraph.

Bridge central counterparty: supplemental property transfer powers

  1. Paragraph 73 applies where the Bank has made a share transfer instrument providing for the transfer of securities by a CCP to a bridge central counterparty. Sub-paragraph (2) outlines that the Bank may make one or more property transfer instruments in relation to the CCP.
  2. Sub-paragraph (3) defines a bridge central counterparty supplemental property transfer instrument.
  3. Sub-paragraph (4) provides that the general and specific conditions (paragraphs 17 and 19 respectively) do not apply to bridge central counterparty supplemental property transfer instruments.
  4. Sub-paragraph (5) provides that the Bank of England must consult the FCA, and (if the CCP is a PRA-authorised person) the PRA, before making the instrument.
  5. Sub-paragraph (6) provides that the possibility of making a bridge central counterparty supplemental property transfer instrument is without prejudice to the possibility of making a property transfer instrument in accordance with paragraph 29(3).
  6. The procedure outlined under 64 will also apply if an instrument is made under this paragraph.

Bridge central counterparty: supplemental reverse property transfer powers

  1. Paragraph 74 sets out that, where the Bank has made a bridge central counterparty supplemental property transfer in accordance with paragraph 73, the Bank may make one or more reverse property transfer instruments in respect of the property rights and liabilities of the transferee under the original instrument. The reverse property transfer instrument is defined in sub-paragraph (3).
  2. Sub-paragraph (5) sets out the conditions that must be met for a reverse property transfer instrument to be used.
  3. Sub-paragraph (4) provides that the general and specific conditions (paragraphs 17 and 19 respectively) do not apply to a bridge central counterparty supplemental reverse property transfer instrument.
  4. Sub-paragraph (6) provides that the Bank of England must consult the FCA, and (if the CCP is a PRA-authorised person) the PRA, before making the instrument.
  5. The procedure outlined under 64 will also apply if an instrument is made under this paragraph.

Restriction of partial transfers

  1. Paragraph 75 sets out a power for HM Treasury to make regulations enabling restrictions to be placed on the making of partial transfers through the property transfer powers by HM Treasury. A partial transfer is the transfer of some, but not all, of a CCP’s property, rights or liabilities (as defined in sub-paragraph (1)). The regulations that may be laid by HM Treasury are outlined in sub-paragraph (2).
  2. Regulations can apply to protected arrangements generally, or in specified circumstances or as a specified kind (sub-paragraph 3).

Power to protect certain interests

  1. Paragraph 76 sets out a power to enable certain private law rights to be protected when the property transfer powers are exercised to effect a partial transfer. A partial transfer is the transfer of some, but not all, of a CCPs property, rights or liabilities (as defined in sub-paragraph (1) of paragraph 75).
  2. Sub-paragraph (1) broadly defines the certain interests ("protected arrangements") for which the power may provide protection. This provision reflects the extremely broad range of relevant interests which exist in this field. The interests which the exercise of the power is intended to cover may include, for example, security interests and set-off and netting arrangements.
  3. Under the power, such interests may be protected in the ways set out in sub-paragraph (2), as supplemented by sub-paragraph (3).
  4. Sub-paragraph (4) allows for regulations to include provision for determining which arrangements are to be considered protected arrangements (with ‘arrangements’ being defined in sub-paragraph (5)).

Creation of liabilities

  1. Paragraph 77 explains that a property transfer instrument may include provision for the creation of liabilities.

Regulation for safeguarding certain financial arrangements

  1. Paragraph 78 sets out that HM Treasury may make regulations in cases where write down instruments may interact with or affect protected arrangements (sub-paragraph (3)). Regulations under this paragraph can restrict the making of instruments, impose conditions on a write-down instrument, require write-down instruments to included specific provisions, provide for a write-down instrument to be void, and specify principles that the Bank must have regard to when making a write-down instrument.
  2. Regulations can apply to protected arrangements generally, or in specified circumstances or as a specified kind (sub-paragraph 4).
  3. Regulations made by HM Treasury may include provision for determining what is, or is not to be, treated as a protected arrangement.

Resolution instruments: effect and supplementary matters

  1. Paragraph 79 outlines the powers of, and requirements imposed on, resolution instruments (which must be made in writing). A resolution instrument enables the Bank to exercise all stabilisation options other than those that require use of a share or property transfer instrument.
  2. Sub-paragraph (3) outlines that resolution instruments cease to have effect in relation to CCPs on one of the following occurring; the date specified in the instrument is reached (though the Bank may amend this in consultation with HM Treasury, as set out in sub-paragraphs (4) and (5)), a share transfer or property transfer instrument is made in relation the CCP, or any of the resolution conditions cease to have effect in relation to the CCP.
  3. Sub-paragraph (6) outlines that provision made in a resolution instrument will take effect regardless of any restriction arising from contracts or legislation in another way, and sub-paragraph (7) set out that it may provide for anything that is affected by the instrument to be continued that was in the process of being done immediately before the instrument takes effect (including legal proceedings).
  4. Sub-paragraphs (8) to (10) specify that a resolution instrument can modify references in an instrument or document, require or permit any person to provide information and assistance to the Bank or another person, and include incidental, consequential, or circumstantial provision. Sub-paragraph (11) states that an instrument ceasing to have effect does not affect the validity of anything previously done in accordance with it.

Write-down instruments: supplementary

  1. Paragraph 80 makes provision for instruments that allow the Bank to exercise its power to write-down unsecured liabilities.

Resolution instruments: procedure

  1. Paragraph 81 outlines the procedural requirements for resolution instruments.
  2. The Bank must, as soon as is reasonably practicable after making a resolution instrument in respect of a CCP, send a copy of the instrument to the organisations listed in sub-paragraph (1).
  3. The Bank must also follow the instructions in sub-paragraph (2), regarding publishing a copy of the resolution instrument. HM Treasury must also lay a copy of the resolution instrument before Parliament.

Supplemental resolution instruments

  1. Paragraph 82 applies where the Bank has made a resolution instrument. The Bank may make additional resolution instruments, designated by the Bank as supplemental resolution instruments.
  2. Sub-paragraph (3) provides that paragraphs 17 and 79(3)(c) do not apply to a supplemental resolution instrument.
  3. Sub-paragraph (4) provides that the Bank of England must consult the FCA, and (if the CCP is a PRA-authorised person) the PRA, before making the instrument.
  4. Sub-paragraph (5) clarifies that the possibility of making a supplemental resolution instruments is done without prejudice to the possibility of making new instruments in accordance with the paragraphs outlined.

Directors and senior managers

  1. Paragraph 83 allows the Bank, through a resolution instrument, to take various actions with regard to directors and senior managers of CCPs or relevant CCP group companies in respect of a CCP, including appointment and removal, termination and variation of service contracts.
  2. Sub-paragraph (4) clarifies that appointments are to be made on terms and conditions agreed by the Bank.

Termination rights etc

  1. Paragraph 84 sets out certain provisions in relation to default event provisions of the two types set out in the paragraph. Sub-paragraph (6) allows for default event provisions (e.g. termination rights) not to be triggered in relation to the exercise of a resolution measure (as defined in sub-paragraph (1)) and the occurrence of any event directly linked to the application of such a measure.

Deferment

  1. Paragraph 85 outlines that HM Treasury may make provisions through regulations for the suspension or waiver of provisions that are made under a resolution instrument. This would enable the Bank to defer enforcement of obligations imposed on a clearing member of a CCP through its exercise of its resolution powers.
  2. Sub-paragraph (2) provides examples of provisions that may be made under this section.

Recovery of expenses

  1. Paragraph 86 provides that the Bank may direct a CCP to pay the Bank a fee to cover expenses reasonably incurred by the Bank in making a resolution, share transfer, or property transfer instrument.
  2. Sub-paragraph (2) provides that HM Treasury may also exercise a similar power to recover its own reasonable expenses.

Compensation scheme

  1. Paragraph 87 outlines that HM Treasury may, by making regulations, make provision for protecting the financial interests of persons in connection with the making of a relevant instrument. The regulations may provide for a scheme which may, for example, determine whether compensation is required, pay compensation, and under which specified relevant persons become entitled to the proceeds of the disposal of things transferred under a share transfer/property transfer instrument.
  2. Sub-paragraph (3) ensures HM Treasury must have regard to the desirability of ensuring a person is not worse off under a relevant instrument than they would have been if the CCP had entered insolvency immediately before the relevant instrument was made and all the relevant rules of the CCP had been applied in the period leading up to insolvency.
  3. Sub-paragraph (6) notes that regulations may provide for compensation either by HM Treasury or any other specified person.

Instruments: notification of members and creditors

  1. Paragraph 88 sets out that, where the Bank has applied one or more stabilisation options, the Bank must send a copy of any share/property transfer or resolution instrument to the shareholders (or members, where the CCP is an unincorporated association) and creditors of the CCP known to the Bank. This is unless securities issued by the CCP have been admitted to trading on a regulated market.

General continuity obligation: property transfers

  1. Under paragraph 89, a residual CCP and each group company (as defined in sub-paragraph (1)) must provide such services and facilities as are required to enable a transferee to operate the transferred business (or part of it) effectively. This duty may be enforced as a contract (sub-paragraph (4)), continues even if the residual CCP or group company enter insolvency (sub-paragraph (5)), and is not limited to the provision of services or facilities directly to a transferee (sub-paragraph (8)).
  2. The Bank may also (with HM Treasury consent) specify activities that are required of the residual CCP or group company (sub-paragraph (9)), with further detail in sub-paragraph (10)).
  3. Sub-paragraph (6) provides that the residual CCP or group company has a right to reasonable consideration, with extra detail provided in (sub-paragraph (7)).

Special continuity obligations: property transfers

  1. Paragraph 90 provides that the Bank may modify, cancel or impose rights and obligations between a transferee, the residual CCP and a group company or third-party (sub-paragraph (2)).
  2. Sub-paragraph (3) provides that the Bank shall aim, so far as is reasonably practicable, to preserve or include provision for reasonable consideration and terms.
  3. Powers in this section may only be exercised if the conditions under sub-paragraph (4) are met. Sub-paragraph (5) ensures that obligations imposed under sub-paragraph (2)(d) or (e) continue to apply despite the residual CCP or group company entering insolvency.

Continuity obligations: onward property transfers

  1. Paragraph 91 provides for the Bank or HM Treasury to extend the general continuity obligation of paragraph 89 or special continuity obligations of paragraph 90 in the circumstances of an onward transfer of property, rights or liabilities (so, for example, continuity obligations could be owed to the onward transferee).
  2. Sub-paragraph (3) provides that onward obligations may be imposed on the persons listed, whilst sub-paragraph (4) clarifies that these obligations may be imposed in addition to, or replacing, initial obligations.
  3. The power under this section is exercisable by giving a notice both to each person on whom a continuity obligation is to be imposed, and the person who is expected to benefit from it. The Bank may exercise the power only with the consent of HM Treasury.

General continuity obligation: share transfers

  1. Paragraph 92 makes provision for services to be provided in respect of a CCP transferred by share transfer from former group companies through means of a general obligation.
  2. Sub-paragraph (3) provides that each former group company (as defined in sub-paragraph (1)) must provide such services and facilities as required to enable the transferred CCP to operate effectively. This duty may be enforced as a contract (sub-paragraph (4)), continues even if the residual CCP or former group company enters insolvency (sub-paragraph (5)), and is not limited to the provision of services or facilities directly to the transferred CCP (sub-paragraph (8)).
  3. The Bank may also (with Treasury consent) specify activities that are required of the residual CCP or former group company (sub-paragraph (9)), with further detail in sub-paragraph (10).
  4. Sub-paragraph (6) provides that the residual CCP or former group company has a right to reasonable consideration, with extra detail provided in (sub-paragraph (7)).

Special continuity obligations: share transfers

  1. Paragraph 93 provides that the Bank, through a share transfer instrument, may modify or cancel a contract or other arrangement between the transferred CCP and a group company or third-party, or otherwise confer and impose rights and obligations upon those entities in respect of a share transfer (sub-paragraph (2)).
  2. Sub-paragraph (3) provides that the Bank shall aim, so far as is reasonably practicable, to preserve or include provision for reasonable consideration and terms expected in arm’s length arrangements.
  3. Powers in this section may only be exercised if the conditions under sub-paragraph (4) are met. Sub-paragraph (5) ensures that obligations imposed under sub-paragraph (2)(b) or (c) continue to apply despite the transferred CCP or former group company entering insolvency.

Continuity obligations: onward share transfers

  1. Paragraph 94 provides for the Bank to extend the general continuity obligation of paragraph 92 or special continuity obligations of paragraph 93 in the circumstances of an onward transfer of securities.
  2. Sub-paragraph (3) outlines who the Bank may impose obligations on. Sub-paragraph (4) provides that onward obligations may be in addition to, or replace, initial obligations.
  3. The power under this paragraph is exercisable by giving a notice both to each person on whom a continuity obligation is to be imposed, and the person who is expected to benefit from it. The Bank may exercise the power only with the consent of HM Treasury.

Continuity obligations: consideration and terms

  1. Paragraph 95 provides HM Treasury with a power to make regulations to specify matters which are to be or not to be considered in determining what amounts to reasonable consideration for the purposes of general continuity obligations, and what provisions to include in accordance with paragraphs 90(3)(b) and 93(3)(b).
  2. Sub-paragraph (2) also provides that the Bank may give guarantees or indemnities in respect of the services or facilities that are providing in pursuance of a continuity obligation.

Continuity obligations: termination

  1. Paragraph 96 provides that the Bank may by notice terminate a general continuity obligation.

Suspension of obligations

  1. Paragraph 97 provides that the Bank may suspend obligations to make a payment or delivery under a contract, if one of the parties is a CCP for which the Bank is exercising a stabilisation power.
  2. Sub-paragraph (2) provides that a suspension does not apply to payments of eligible claims or payments or deliveries to excluded persons.
  3. This power must be exercised through a share transfer instrument, property transfer instrument, resolution instrument or third-country instrument (sub-paragraph 5)), and sub-paragraphs (3) and (4) outline when the suspension may begin and end, and clarify the extent of the suspension and when payment or delivery under a contract will be due in certain circumstances.
  4. Sub-paragraph (6) outlines that the Bank must have regard to the impact of a suspension on the functioning on financial markets.

Restriction of security interests

  1. Paragraph 98 provides that, when exercising a stabilisation power in respect of a CCP, the Bank may suspend the rights of a secured creditor in order to enforce any security interest the creditor has in relation to any CCP assets. This power must be exercised through a share transfer, property transfer, resolution instrument, or third-country instrument.
  2. Sub-paragraph (2) outlines when this suspension must begin and end.
  3. Sub-paragraph (3) sets out a situation in which the Bank may not exercise this power.
  4. Sub-paragraph (6) outlines that the Bank must have regard to the impact of a suspension on the functioning on financial markets.

Suspension of termination rights

  1. Paragraph 99 provides that the Bank may suspend the termination right of any party to a qualifying contract, providing that the obligations under the contract are still being met by the CCP in question, or the conditions in sub-paragraph (3) are met.
  2. Sub-paragraph (4) sets out that the Bank must have regard to the impact of this on the functioning of financial markets, and sub-paragraph (5) sets out that the power must be exercised by way of provision within the instruments listed.
  3. Sub-paragraphs (7), (8) and (9) outline when a person may, or may not exercise their termination right.

Suspension: general provision

  1. Paragraph 100 provides definitions for ‘business day’ and ‘excluded person’ for the purposes of paragraph 97 to 99.

Stay on terminating membership

  1. Paragraph 101 provides that, where the Bank has made a resolution instrument, a member of the CCP may not terminate their membership during the period that the resolution instrument is in force.
  2. Sub-paragraph (4) clarifies that a resolution instrument in relation to a CCP may provide for this power not to apply in relation to member of the CCP, or only apply to extent that is specified by the Bank, if the Bank considers that would advance one or more special resolution objectives (sub-paragraph (5)).

Restriction on remuneration

  1. Paragraph 102 provides that the Bank may, for a specified period, restrict or prohibit discretionary payments to specified employees or shareholders of a CCP, where a share transfer, property transfer or resolution instrument has been exercised. This is similar to the power set out in paragraph 13 and enables the Bank to impose a restriction on discretionary payments in instances when it has exercised a stabilisation option. The period of any restriction may not exceed 5 years.
  2. This power must be exercised by way of provision in a share transfer, property transfer or resolution instrument.

Pensions

  1. Paragraph 103 provides that a share transfer or property transfer instrument may make provision about the consequences of a transfer for a pension scheme, and make provision about the property rights and liabilities of any pension scheme of the CCP. A provision in reliance of this section must have the consent of HM Treasury.
  2. An instrument may modify or apportion rights or liabilities, and property of, or accrued rights in one pension scheme to another. It may also amend the terms of a pension scheme.

Disputes

  1. Paragraph 104 provides that a share transfer, property transfer, or resolution instrument or a third-country instrument may include provision for disputes to be determined in a specified manner. In particular, provision may confer jurisdiction on a court or tribunal, or confer discretion on a specified person.

Tax

  1. Paragraph 105 enables HM Treasury to make regulations including provision in relation to tax in connection with the fiscal consequences of the exercise of a stabilisation power.
  2. Sub-paragraph (2) sets out the taxes in relation to which provision may be made.
  3. Sub-paragraphs (3) and (4) set out what the regulations may apply to, and the effects which the regulations may have.
  4. Sub-paragraph (5) outlines that HM Treasury may make provision for the fiscal consequences of a stabilisation power in respect of things done three months before the exercising of the stabilisation powers, or on or after that date.
  5. Sub-paragraph (6) defines ‘stabilisation power’ under the section in relation to a number of other paragraphs.
  6. Sub-paragraph (7) allows HM Treasury to change the taxes listed in sub-paragraph (2) by regulations.

Stay or sist of legal proceedings

  1. Paragraph 106 provides that where the Bank has exercised a stabilisation power in relation to a CCP or CCP group company, and that CCP or CCP group company is a party to legal proceedings before the court in the UK, the Bank may apply to that court for a stay of proceedings where the Bank reasonably considers it necessary for the effective application of the stabilisation powers.

Insolvency proceedings

  1. Paragraph 107 provides that, if a stabilisation power has been exercised in respect of the CCP, or the conditions in paragraph 17 have been met, insolvency proceedings may not be commenced in relation to the CCP without the consent of the Bank. Sub-paragraph (3) defines "commencement of insolvency proceedings".

Recognition of transferee company

  1. Paragraph 108 provides that the Bank may provide for a company to which the business of a CCP is transferred (as under paragraph 29 (3)) to be treated as a CCP for the purposes of FSMA 2000.
  2. This provision may have effect for a period specified in the instrument, or until an event described in the instrument occurs. This power may only be exercised with the consent of HM Treasury, and by way of provision in a property transfer instrument (or supplemental instrument).

International obligation notice: general

  1. Paragraph 109 provides that the Bank may not exercise a stabilisation power in respect of a CCP if HM Treasury notifies the Bank that the exercise would be likely to contravene an international obligation of the UK.
  2. This notice must be in writing, and may be withdrawn (generally, partially or conditionally) (sub-paragraph (2)), and the Bank must then consider other exercises of pursuing the resolution objectives and avoiding Treasury objections (sub-paragraph (3)). HM Treasury may disapply sub-paragraph (3) and may revoke a notice.

International obligation notice: bridge central counterparty

  1. Paragraph 110 provides that where a bank transferred all or part of a CCP’s business to a bridge CCP, the Bank must comply with any notice of HM Treasury to take, or not to take action ensuring compliance by the UK with its international obligations.
  2. This notice may include timing requirements, must be in writing, and may be withdrawn (generally, partially or conditionally).

Public funds: general

  1. Paragraph 111 makes provision about the role of HM Treasury with regard to public funds when the stabilisation powers are being exercised. It provides that the Bank of England may not exercise a stabilisation power without HM Treasury’s consent if the exercise would be likely to have implications for public funds.
  2. Sub-paragraph (3) provides HM Treasury with the power to specify considerations that should or should not be taken into account in determining whether action has implications for public funds.
  3. Sub-paragraph (4) requires the Bank to consider another exercise of the stabilisation powers if HM Treasury has refused consent. In doing so the Bank must pursue the special resolution regime objectives and avoid the objections that HM Treasury first made.
  4. Sub-paragraph (5) allows HM Treasury, by notice, to disapply the requirement to consider alternative actions (as set out in sub-paragraph (4)). Any such notice may be revoked.

Public funds: bridge central counterparty

  1. Paragraph 112 makes provision about the role of HM Treasury with regard to public funds when a CCP has been fully or partially placed into a bridge institution.
  2. Sub-paragraph (2) states that the Bank of England may not take any action in respect of the bridge CCP without HM Treasury’s consent if the action would be likely to have implications for public funds.
  3. Sub-paragraph (3) applies paragraph 111(2) and (3) for the purposes of this paragraph.

Private sector purchaser: report

  1. Paragraph 113 provides that, where the Bank has sold all or part of a CCP’s business to a private sector purchaser, the Bank must report to the Chancellor of the Exchequer about the exercise of the power to make share and property transfer instruments under paragraph 27(2).
  2. Sub-paragraph (4) provides that the first report be made as soon as is reasonably practicable after the end of one year, and the report must comply with any requirements specified by HM Treasury (sub-paragraph (3)).

Bridge central counterparty: report

  1. Paragraph 114 sets out requirements for the Bank to report to the Chancellor of the Exchequer on the activities of a bridge CCP.
  2. Sub-paragraphs (2) and (3) requires the first report to be made as soon as is reasonably practicable after the end of one year and each subsequent year.
  3. Sub-paragraph (4) requires the Chancellor of the Exchequer to lay a copy of the reports mentioned in sub-paragraphs (2) and (3) before Parliament.
  4. Sub-paragraph (5) requires the Bank of England to comply with any request of HM Treasury for a report dealing with specified matters in relation to the bridge CCP. The request may include the content or timing (sub-paragraph (6)).

Resolution instruments: report

  1. Paragraph 115 provides that, where the Bank makes one or more resolution instruments in respect of a CCP, the Bank must at HM Treasury’s request report to the Chancellor of the Exchequer about the exercise of the power. Sub-paragraph (3) states that the report must comply with any requirements specified by HM Treasury.
  2. Sub-paragraph (4) requires the Chancellor of the Exchequer to lay a copy of each report before Parliament.

Transfer of ownership: report

  1. Paragraph 116 provides that, where the Bank makes one or more share transfer instruments in respect of a CCP under paragraph 30 sub-paragraph (2) (transfer of ownership), the Bank must report to the Chancellor of the Exchequer about the exercise of the power.
  2. Sub-paragraph (4) provides that the first report be made as soon as is reasonably practicable after the end of one year, and the report must comply with any requirements specified by HM Treasury (sub-paragraph (3)).

Sale to commercial purchaser, transfer to bridge central counterparty and transfer of ownership: conditions for group companies

  1. Paragraph 117 lays out the conditions that must be met if the Bank is to exercise a stabilisation power in respect of a CCP group company in accordance with paragraph 27 sub-paragraph (2) (private sector purchaser), paragraph 29 sub-paragraph (3) (bridge CCP) or paragraph 30 sub-paragraph (2) (transfer of ownership).
  2. Sub-paragraph (2) sets out that the Bank must be satisfied the general conditions for exercising a stabilisation power are met in respect of a CCP in the same group, and the Bank is satisfied that exercise of the power is necessary (sub-paragraph (3)).
  3. Sub-paragraph (4) sets out that in a financial assistance case, HM Treasury must first recommend a stabilisation power be used and the Bank must be of the opinion that the exercise of the power is appropriate.
  4. Sub-paragraph (5) sets out that the CCP group company must be an undertaking incorporated in or formed under the law of the UK.
  5. Sub-paragraph (6) sets out that the Bank must consult HM Treasury, the FCA, and (if the CCP is a PRA-authorised person) the PRA.
  6. Sub-paragraph (7) sets out that the Bank must have regard to the need to minimise the effect of the power on other undertakings in the same group, whilst sub-paragraph (8) defines "financial assistance case".

Paragraph 117: Supplemental

  1. Paragraph 118 provides that where the Bank exercise a stabilisation power in respect of a CCP group company in reliance on paragraph 117, the provisions apply as if the CCP group company were a CCP (with some exceptions, outlined in sub-paragraph (2)).

Part 6 – Information, investigation and enforcement

Information

  1. Paragraph 119 outlines the powers available to the Bank for acquiring information and documents reasonably required in connection with the exercise of functions conferred on the Bank by or under the Schedule.
  2. Sub-paragraphs (2) to (6) outline that the Bank, or an officer authorised by the Bank, may require a CCP or group company to provide specified information or documents, and may determine the form and reasonable timeline for producing the documents.
  3. Sub-paragraph (7) outlines that the Bank may also impose these requirements on a person connected to the CCP.

Reports by skilled persons

  1. Paragraph 120 provides that, where the Bank has required a person (defined in sub-paragraph (2)) to provide information in accordance with paragraph 119, the Bank may produce a notice to a person to provide a report or appoint a person to provide a report.
  2. The person appointed must have the skills necessary to make a report. If an appointment is made by the person concerned, the appointee must be nominated or approved the Bank.
  3. Sub-paragraph (7) outlines that the appointed person must be given all assistance they reasonably require by the person concerned (as defined in sub-paragraph (2)).
  4. Sub-paragraph (8) outlines that the assistance requirement (sub-paragraph (7) is enforceable by an injunction (except in Scotland, where an order for specific performance applies), and sub-paragraph (9) notes that the CCP may be required to pay the Bank a fee to cover expenses incurred by the Bank in relation to the appointment.

Appointment of persons to carry out general investigations

  1. Paragraph 121(2) outlines the three things the Bank may appoint one or more competent persons to conduct an investigation into: the nature, conduct, or state of a CCP’s business, a particular aspect of that business, or the ownership or control of a CCP.
  2. Sub-paragraph (3) provides that, with written notice, a person may investigate the business of a person who is, or has been at a relevant time, a member of a group of which the CCP under investigation is part.

Appointment of persons to carry out investigations in particular cases

  1. Paragraph 122 provides that, if the Bank thinks that a person may have failed to comply with any relevant requirement (meaning a requirement imposed by the Bank by or under the Schedule, the Bank may appoint a competent person to conduct an investigation on its behalf.

Investigations etc in support of foreign resolution authorities

  1. Paragraph 123 provides for the Bank to exercise the power conferred in paragraph 119 or appoint one or more competent persons to investigate any matter, in relation to a request from a foreign resolution authority.
  2. Sub-paragraph (3) stipulates an applicable request by a foreign resolution authority as one in connection with the exercise by that authority of functions in relation to third-country resolution action (within the meaning of paragraph 145 of this Schedule).
  3. Sub-paragraph (4) explains that an investigator appointed under this paragraph has the same powers as an investigator appointed under paragraph 122.

Investigations: general

  1. Paragraph 124 provides that, if the Bank appoints one or more investigators to conduct an investigation on its behalf (under paragraph 121 or paragraph 122), the person under investigation must be notified by the Bank. The notice must state the reason for the appointment and specify the provisions under which (and as a result of which) the investigator has been appointed.
  2. Sub-paragraphs (4) and (5) provide that the investigator may be a member of staff at the Bank, and must make a report of the investigation to the Bank.
  3. Sub-paragraphs (6) and (7) outline the ways in which the Bank may direct the investigation, and sub-paragraph (8) provides that the person under investigation must be notified of a significant change in scope.
  4. If the appointment was made under paragraph 122, the Bank does not need to notify the person under investigation if they believe it will result in the investigation being frustrated.

Powers of persons appointed under paragraph 121

  1. Paragraph 125 provides that, if a person is appointed under paragraph 121 to conduct an investigation, the investigator may require the person under investigation (or any connected person) to answer questions in person, or provide required information, or produce documents at a specified time or place. The investigator can only impose such requirements at a specified time and place, as long as the investigator reasonably considers the information relevant for the purposes of the investigation.

Powers of persons appointed as a result of paragraph 122

  1. Paragraph 126 provides that, if an investigator was appointed under paragraph 122, they have the powers conferred under paragraph 125, and may also require the person under investigation to give all assistance they can reasonably give. If they see it as necessary or expedient, the investigator may also require a person who is neither under investigation, or connected with the investigation, to answer questions at a specified time and place, or provide information that is required for the purposes of the investigation.

Admissibility of statements made to the investigators

  1. Paragraph 127 provides that a statement made to an investigator appointed under paragraph 121 or 122 by a person that complies with an information requirement is admissible in evidence in any proceedings (subject to the general law on admissibility of evidence).
  2. Sub-paragraphs (2) and (3) stipulate that, in criminal proceedings in which a person is charged with an offence other than an offence listed in sub-paragraph (3) (which relate generally to making false or misleading statements or failing to comply with information requirements imposed by an investigator), no evidence relating to the statement may be adduced and no question relating to it may be asked, by or on behalf of the prosecution or the Bank.

Information and document: supplemental provision

  1. Paragraph 128 provides that, where a person has been required to produce a document but it is in the possession of a third person, the Bank may impose that requirement on the third person.
  2. A person to whom the document is produced may take copies or extracts of the document, and require any relevant person to provide an explanation of the document.
  3. An investigator or the Bank may require the person to state, if they fail to produce a document, where they believe the document to be, and lawyers may be required if necessary to furnish the name and address of a client.
  4. A document so produced may be retained for so long as the person to whom it is produced considers it necessary to retain, and if there are reasonably grounds for believing that it may be required in connection with to legal proceedings it may be retained until they are concluded.
  5. Information which comes under and is subject to an obligation of confidence may be exempt from a requirement to disclose, unless one or more of the conditions outlined under sub-paragraph (7) apply.
  6. Sub-paragraph (8) clarifies that if a person claims a lien on a document, its production under this part will not affect the lien, whilst sub-paragraph (9) provides definitions.

Protected items

  1. Paragraph 129 outlines that a person may not be required under this Schedule to produce, disclose or permit the inspection of protected items, as defined by sub-paragraphs (2), (3), and (4) (broadly meaning legally privileged communications and material).

Entry of premises under warrant

  1. Paragraph 130 provides that a justice of the peace may issue a warrant if there are reasonable grounds to believe that the conditions in sub-paragraph (2), (3) and (4) are met, based on information on oath that is given by, or on behalf of, the Secretary of State, the Bank or an investigator.
  2. Sub-paragraph (5) outlines the various actions a warrant under this section authorises a constable to perform. Sub-paragraphs (6), (7) and (8) clarify that that a warrant may authorise any constable, or person authorised by and under the supervision of a constable.

Retention of documents obtained under paragraph 130

  1. Paragraph 131 provides that any document of which possession is taken under warrant (paragraph 130) may be retained so long as it is necessary to retain it in the circumstances.
  2. Sub-paragraphs (2), (3), (4), and (5) outline the legal proceedings for any person claiming to be the owner of a document appealing for its return.

Offences etc

  1. Paragraph 132 sets out the criminal offences which apply in relation to investigations. Paragraphs (1) and (2) provide that if a person fails to comply with requirements imposed under an investigation without reasonable excuse, that person can be dealt with as if they were in contempt of court. Sub-paragraphs (4), (5) and (6) set out other offences relating to the falsification, concealment or destruction of documents by a person who knows that an investigation is being or is likely to be conducted, the provision of false or misleading information in response to a requirement imposed under this Schedule, and the intentional obstruction of the exercise of rights conferred by a warrant under paragraph 130. Sub-paragraph (7) sets out the penalties for these offences.

Prosecution of offences under paragraph 132

  1. Paragraph 133 provides that proceedings for an offence under paragraph 132 may be instituted only by the Bank or with the consent of the Director of Public Prosecutions (in England and Wales) or the Director of Public Prosecutions for Northern Ireland. Sub-paragraphs (2) and (3) note provide that the Bank must comply with any conditions or restrictions imposed by HM Treasury.

Offences under paragraph 132 by bodies corporate etc

  1. Paragraph 134 outlines how the offences in paragraph 132 relate to bodies corporate. Sub-paragraph (1) outlines that both bodies corporate and officers may be subject to proceedings and punished accordingly if sub-paragraphs (a) and (b) apply. Sub-paragraph (3) makes similar provision in respect of partnerships and partners. In a case where a body corporate is managed by its members, sub-paragraph (1) applies as if that member were a director of the body (as per sub-paragraph (2)).
  2. Sub-paragraph (6) provides for offences committed by an unincorporated association.

Injunctions: prevent failure to comply with relevant requirement

  1. Paragraph 135 provides that the court may make an order restraining (or in Scotland an interdict prohibiting) a contravention by a person that the court is satisfied is reasonably likely to contravene a relevant requirement (as defined in paragraph 122). Sub-paragraph (2) clarifies how this is exercised within England and Wales.

Regulatory sanctions

  1. Paragraph 136 outlines the actions (regulatory sanctions) the Bank may take if they consider that a person has failed to comply with a relevant requirement (as defined in paragraph 122). Sub-paragraphs (1), (2), (3) and (4) outline the actions the Bank may take and their duration, including censures, fiscal penalties, directions and disqualifications, and that those penalties must be paid to the Bank (and can be enforced by the Bank as a debt).

Determination of sanctions

  1. Paragraph 137 outlines the circumstances the Bank must take into account when determining the type of sanction or level of any penalty to be imposed under paragraph 136.

Procedure: warning notice

  1. Paragraph 138 outlines that the Bank must give a person a warning notice if imposing a sanction under paragraph 136 and sets out the content the warning notice must include.
  2. Sub-paragraphs (2) and (3) outline how section 387 of FSMA 2000 applies to warning notices given under this paragraph.

Procedure: decision notice

  1. Paragraph 139 outlines that if the Bank decides to impose a sanction on a person under paragraph 136, it must (without delay) give that person a decision notice. Sub-paragraphs (2), (3), (4) and (5) outline what a decision notice must specify in different contexts.
  2. Sub-paragraphs (6) and (7) outline how section 388 of FSMA 2000 applies to decision notices given under this paragraph.

Procedure: general

  1. Paragraph 140 outlines how the procedure set out in certain sections in FSMA 2000 apply to a warning notice given under paragraph 138, or a decision notice given under paragraph 139.

Appeals

  1. Paragraph 141 outlines that a person may appeal to the Upper Tribunal in respect of a sanction imposed on them by the Bank under paragraph 136.

Injunctions: failure to comply with certain paragraph 136 sanctions

  1. Paragraph 142 outlines actions the court may take if it is broadly satisfied that there has been, or will be, or may have been a compliance failure (as defined in sub-paragraph (4)) in respect of certain sanctions imposed under paragraph 136 (sub-paragraphs (1), (2) and (3)). These actions include (among others) orders restraining the conduct constituting a failure to comply, or requiring a person to take such steps as directed by the court to remedy a failure to comply.
  2. Sub-paragraph (5) sets out the courts within England and Wales which have jurisdiction in respect of the matters in this paragraph.

Publication

  1. Paragraph 143 provides that, in the case of a warning notice given under paragraph 138, neither the Bank nor the person to whom the notice is given or copied may publish the notice, though the Bank may publish such information as it considers appropriate after consulting the persons to whom it is given or copied (sub-paragraph (1)).
  2. Sub-paragraph (2) provides that a person given a decision notice under paragraph 139 may not publish the notice or any details unless the Bank has published the notice or those details.
  3. Sub-paragraphs (3) and (4) outline the content that must sit within, and accompany, a notice of discontinuance.
  4. Sub-paragraph (5) sets out that the Bank may publish information regarding a decision notice. Under sub-paragraph (6), where the Bank has published information relating to a decision notice, the Bank must publish updated information (comprising the status and outcome of the appeal) if the matter to which the decision notice relates is appealed to the Upper Tribunal. The Bank must also publish details of any sanction where the Bank gives a final notice (sub-paragraph (7)) and if the circumstances in sub-paragraph (8) apply in relation to information to which a decision notice or a final notice relates, such information must be published anonymously (further details on this are in sub-paragraph (9)).
  5. Any published information must remain for five years on the Bank’s website, unless this contradicts data protection legislation (sub-paragraph (10)).

Co-operation

  1. Paragraph 144 outlines that if imposing sanctions under paragraph 136, the Bank must take steps as it considers appropriate to co-operate with the organisations, authorities and persons in sub-paragraphs (a) and (b).

Part 7 – Third-country resolution actions

  1. Paragraph 145 applies where the Bank is notified of third-country resolution action, in respect of a third-country central counterparty. With the approval of HM Treasury (sub-paragraph (3)), the Bank must make an instrument which either recognises the action, or refuses to recognise the action, or recognises part all or part of the action but not the remainder (sub-paragraph (2)).
  2. Recognition of the action may be refused if the Bank and HM Treasury are satisfied that the conditions in sub-paragraph (4) are met, and recognition of third-country resolution actions is without prejudice to normal insolvency proceedings (sub-paragraph (5)).
  3. Paragraph 146 applies where an instrument under paragraph 145 recognises all or part of the third-country resolution action. The third-country resolution actions produce the same legal effect in any part of the UK as it would have produced had it been made under the law of the relevant part of the UK. The Bank may, to support or give full effect to a third-country resolution action, exercise one or more stabilisation options in relation to the third-country central counterparty (sub-paragraph (3)).
  4. Sub-paragraph (4) provides further detail on which instruments these provisions may sit within, and that the wider Schedule applies to any power exercised under sub-paragraph (3), pending the modifications made in sub-paragraphs (6) and (7).
  5. Paragraph 147 applies (with some modifications) certain other paragraphs within the Schedule to a third-country instrument.

Part 8 – General

Information

  1. Paragraph 148 permits the Bank of England to disclose information relating to the financial stability of the individual financial institutions or aspects of the financial system of the United Kingdom. It may disclose information to HM Treasury, the FCA, the Financial Services Compensation Scheme, the Payment Systems Regulator, and authorities in jurisdictions outside the United Kingdom exercising similar functions to those of HM Treasury and the financial authorities. The provision overrides other confidentiality requirements and is without prejudice to any other power to disclose information.

Restrictions on disclosure of confidential information

  1. Paragraph 149 outlines how certain sections in FSMA 2000 relating to the disclosure of confidential information apply to this Schedule, and notes modifications.
  2. This will enable the Bank of England to share relevant information that it may have received in relation to its financial stability functions, for example from an institution administered under the special resolution regime.

Remedies on judicial review

  1. Paragraph 150 outlines the effect that a decision from a judicial review concerning the decision of the Bank to exercise stabilisation powers may have on a "relevant provision" or "relevant transfer" (as defined in sub-paragraphs (2)(b) and (c)).
  2. Sub-paragraph (3) clarifies that the power of the court to award damages (subject to the immunity provided under section 244 of the Banking Act 2009) is not affected by sub-paragraph (1).

Giving of notices, documents etc under this Schedule

  1. Paragraph 151 notes that regulations made under section 414 of FSMA 2000, and subsection (4) of that section, apply in relation to any notice, direction or document required to be given under this Schedule.

Financial assistance

  1. Paragraph 152 provides a definition of "financial assistance" and allows HM Treasury to make regulations to further define financial assistance for the purposes of the Act.

Modifications to the law

  1. Paragraph 153 enables HM Treasury to modify the law in order to allow powers made under the Schedule to be used effectively, having regard to the special resolution objectives. This includes regulations with retrospective effect (sub-paragraph (3)), though HM Treasury must note it is in the public interest to avoid this.
  2. Sub-paragraph (6) outlines that regulations under this paragraph are subject to the affirmative procedure, or if HM Treasury deems it necessary for the regulations to come into force without delay, the made affirmative procedure.

Interpretation

  1. Paragraph 154 provides a number of definitions relevant to this Schedule.

Recognised central counterparty

  1. Paragraph 155 defines a "recognised central counterparty" for the purpose of this Schedule. Sub-paragraph (2) notes that a recognised central counterparty does not include a recognised clearing house which is also a bank, building society, credit union or investment firm. Sub-paragraph (3) notes that a recognised central counterparty does not cease to have that status for the purposes of this Schedule if its recognition under FSMA 2000 is revoked.

Interpretation: CCP group company, etc

  1. Paragraph 156 defines "CCP group company", and gives HM Treasury the power to make regulations to further define a CCP group company.

Part 9 – HM Treasury support for CCPs

Consolidated fund

  1. Paragraph 157 provides for any expenditure incurred by HM Treasury in connection with the exercise of the powers in this Schedule, by HM Treasury or Secretary of State (with the consent of HM Treasury) in connection with the giving of financial assistance to or in respect of CCPs or in connection with the provision of financial assistance by HM Treasury to the Bank of England to be paid from money provided by Parliament. Financial assistance includes giving guarantees or indemnities.

National loans fund

  1. Paragraph 158 allows HM Treasury to draw money from the National Loans Fund for the purpose of making a loan to or in respect of a CCP, when the loan is required urgently to protect the stability of the financial systems of the United Kingdom.

Part 10 – Consequential etc provision

  1. Paragraphs 159 to 164 make consequential amendments to a number of enactments to ensure these apply correctly to Schedule 11.
  2. Paragraph 165 allows HM Treasury to make regulations to provide for provisions in of certain listed enactments to apply for the purposes of Schedule 11, with or without modifications.

Schedule 12: Write-down orders

Part 1 – Write-down orders: main provisions

  1. Paragraph 1 of Schedule 12 amends Part 24 of FSMA 2000. It amends section 360 of FSMA 2000 to require that a person may not be appointed as administrator of an insurer in relation to which a write-down order under new section 377A of FSMA 2000 is in effect without the consent of the Prudential Regulation Authority (PRA). It also omits section 377 of FSMA 2000 and inserts sections 377A to 377J. The effects of each of the new sections inserted into FSMA 2000 are detailed below. Nothing inserted by these provisions affects the requirement for an insurer to comply with its broader obligations as an authorised person once a write-down order is made.
  2. Section 377A provides more detail on write-down orders. In particular, the section explains what a write-down order is, sets out the test which the court must consider when deciding whether to make a write-down order, makes provision about when a write-down order takes and ceases to have effect (cross-referencing section 377H),provides that a write-down order cannot be made in respect of an insurer in administration or in liquidation and provides that liabilities under write-down orders are, to the extent of their reduction, to be treated as extinguished unless and until they are revived (cross-referencing section 377H and 377I).
  3. Section 377B sets out the liabilities which cannot be written-down under a write-down order.
  4. Section 377C sets out the parties able to apply to the court to make a write-down order. It also sets out, in particular, the consent which certain applicants must obtain before making an application.
  5. Section 377D gives the FCA and the PRA the right to be heard at court hearings relating to a write-down order and to receive documents related to those hearings.
  6. Section 377E sets out the court’s powers once an application for a write-down order has been received.
  7. Section 377F requires an insurer subject to a write-down order to notify "affected persons" (the meaning of which will be specified in Rules made by the PRA) and the FCA and the PRA as soon as possible after the order is made. The broader regulatory obligations on an insurer as an authorised person may require additional notifications separate from this legislative requirement.
  8. Section 377G sets out the court’s powers to appoint an eligible person or persons to act as a ‘manager of a write-down order’ (the manager). The section includes provision that the court can only appoint a person as a manager if the PRA provides a statement confirming they are suitably qualified (for example if they are an actuary, a licensed insolvency practitioner, or a suitably qualified insurance professional). The majority of the procedural provisions in sections 337C and 377D apply in relation to a manager, as they apply in relation to a write-down order.
  9. Section 377H provides that a write-down order ceases to have effect on the date specified in the order or on the date a "termination event" occurs (the latter only if the termination event is earlier than the date specified or no date is specified). Termination events include the making of a winding up order against the insurer and the insurer entering administration, among others set out in the section.
  10. Section 377I sets out how the court can revoke or vary a write-down order, including broadening or narrowing the scope of the order. When deciding whether to revoke or vary a write-down order, the court must apply the same test it applies when deciding whether to make an order. Subject to certain differences, the procedural provisions relating to the making of a write-down order and the appointment of a manager under sections 377C to 377G also apply to termination or variation of a write-down.
  11. Section 377J is self-explanatory.

Part 2 – The manager of a write-down order

New Schedule 19A
  1. Paragraph 2 of Schedule 12 inserts a new Schedule 19A to FSMA 2000, which makes further provision about the manager. The effect of the provisions included in Schedule 19A are detailed below.
  2. Paragraph 1 of the new Schedule 19A sets out that the Schedule only applies where the court has: (i) made a write-down order in relation to an insurer; and (ii) appointed a manager. Paragraph 1 also makes provision in relation to the application of the Schedule where one or multiple persons are appointed as the manager.
  3. Paragraph 2 is self-explanatory.
  4. Paragraph 3 provides that a manager must monitor the insurer’s affairs to consider whether the write-down order remains reasonably likely to lead to a better outcome for policyholders and creditors (taken as a whole) than if the write-down order were not in effect. Paragraph 3 also provides that the manager must consider whether the insurer could take or refrain from taking certain actions so that the write-down order would remain, or once again become, reasonably likely to lead to a better outcome for policyholders and creditors (taken as a whole), and provides that the manager can make relevant recommendations to the insurer. Paragraph 3 also sets out that the manager must produce a report if directed to do so by the FCA or the PRA.
  5. Paragraph 4 sets out that the manager must apply to the court for such orders as the manager thinks likely to achieve the best outcome for the insurer’s policyholders and other creditors (taken as a whole) if they form the view that it would be in the interests of the insurer’s policyholders and creditors (taken as a whole) for the order to be varied or revoked.
  6. Paragraph 5 empowers the manager to require the provision of information and assistance (as reasonably required to undertake its functions) by the people listed in sub-paragraph (2), and requires that the information be provided as soon as practicable; subparagraph (4) provides that the manager can enforce the provision of information through an application for an injunction/specific performance.
  7. Paragraph 6 is self-explanatory.
  8. Paragraph 7 provides that the actions, omissions or decisions of a manager can be challenged through an application to the court by the parties listed and sets out the court’s powers when a challenge to the manager is brought.

Part 3 – Further provision about write-down orders

New Schedule 19B
  1. Paragraph 3 of Schedule 12 inserts a new Schedule 19B into FSMA 2000, which provides for:
    1. restrictions on the enforcement against an insurer (including the enforcement of security over the insurer’s property) (Part 1);
    2. restrictions on the insurer’s dealing with assets, paying variable renumeration and making of distributions to shareholders (Part 2);
    3. the treatment of an insurer’s liabilities in certain circumstances (Part 3); and
    4. the interest payable in respect of liabilities reduced under a write-down order (Part 4).
  2. The effects of the provisions included in Schedule 19B are described in further detail below.

Part 1 of new Schedule 19B: Restrictions on enforcement

  1. Paragraph 1 sets out when the restrictions on enforcement provided for by Paragraph 2 have effect. These restrictions apply initially (on an interim basis) from when an application for a write-down order is put to the court until a write-down order is made or the application is withdrawn or dismissed. Paragraph 1 provides that the restrictions subsequently apply (on a permanent basis) from the date a write-down order is made for a default period of 6 months (beginning with the day on which the order takes effect) and any such further period as the court may order (which cannot be more than six months per order). These restrictions cease to apply if the court orders so, or if the write-down order ceases to have effect in accordance with section 377H of FSMA 2000. The court may extend or terminate the restrictions only on an application by the persons set out in Paragraph 1(4).
  2. Paragraph 2 sets out the restrictions on enforcement which take effect for such periods as provided for under Paragraph 1. The restrictions prevent an insurer’s creditors from taking steps, without the permission of the court, to, for example, enforce security over the insurer’s property. Paragraph 2 empowers the court to impose conditions on any consent it gives for an act of enforcement to be taken which would otherwise be prohibited under the paragraph.
  3. Paragraph 3 sets out exceptions to the restrictions imposed by Paragraph 2. This Paragraph provides HM Treasury with a power to amend certain of the exceptions through statutory instrument under the draft affirmative procedure.

Part 2 of new Schedule 19B: Dealing with assets etc

  1. This Part is intended to prevent inappropriate value extraction from an insurer subject to a write-down order under new section 377A of FSMA 2000.
  2. Paragraphs 4 to 7 are self-explanatory.

Part 3 of new Schedule 19B: Treatment of written-down liabilities for certain purposes

  1. Paragraph 8 sets out that Part 3 of Schedule 19B applies to liabilities of an insurer when the value of a liability has been reduced by or under a write-down order.
  2. Paragraph 9 sets out that written-down liabilities (and the potential for a future reversal of the write-down) will be disregarded for the purposes of section 123 Insolvency Act 1986 or Article 103 of the Insolvency (Northern Ireland) Order 1989 (to ensure that an insurer cannot be deemed ‘unable to pay its debts’ on the basis of liabilities which have been written-down); the PRA’s prudential rules governing insurers; and Solvency II. This is to ensure that written-down liabilities are treated as extinguished for these purposes, for so long as the write-down is in force. Without this, an insurer could still meet the statutory test for insolvency following its liabilities being written-down or have the potential for a future reversal of the write-down reflected on its balance sheet as a contingent liability, contrary to the intended effect of the write-down which is to restore an insurer’s balance sheet. Paragraph 9(3) gives HM Treasury a power to amend the purposes for which written-down liabilities are disregarded through statutory instrument under the draft affirmative procedure.
  3. Paragraph 10 concerns pay-as-paid clauses. These clauses stipulate that a reinsurer must only pay out the amount the original insurer (cedant) actually pays to underlying policyholders. Paragraph 10 overrides "pay-as-paid" clauses held between an insurer under write-down and its reinsurers, meaning reinsurers will remain liable for the full amount due, even if the court has reduced the value of the liability owed by the cedant insurer to the underlying policyholder. This prevents the value of outwards reinsurance contracts held by an insurer under write-down from decreasing and providing undue financial benefits to a reinsurer.

Part 4 of new Schedule 19B: Interest

  1. Paragraph 11 sets out the interest payable in respect of liabilities reduced under a write-down order.

Part 4 – Write-down orders: financial services compensation scheme

  1. Paragraph 4 of Schedule 12 is self-explanatory.
  2. Paragraph 5 of Schedule 12 inserts a new section 217ZA and section 217ZB into FSMA 2000. Section 217ZA provides that the rules underpinning the Financial Services Compensation Scheme (FSCS) must require the FSCS to provide financial assistance to protected policyholders whose entitlements reduce in value following a write-down order under section 377A. Subsection 5 of section 217ZA sets out that the financial assistance provided by the FSCS under this section must not be used for any purpose other than enabling payments to be made to protected policyholders and will not appear as an asset on the insurer’s balance sheet. Section 217ZB provides for the FSCS to have the right to recover the financial assistance provided to an insurer. The right of recovery must not be taken into account in assessing an insurer’s liabilities for the purposes of a relevant insolvency provision, as set out in paragraph 9 of Schedule 19B. This right of recovery must not be exercised against a policyholder.
  3. Paragraph 6 of Schedule 12 amends section 219 of FSMA 2000, setting out that the FSCS can obtain information from an insurer who has been given financial assistance under section 217ZA.
  4. Paragraph 7 of Schedule 12 inserts section 220A of FSMA 2000, allowing an FSCS-authorised person to inspect documents held by a write-down manager, for the purpose of assisting the FSCS to discharge its functions under sections 217ZA and 217ZB.

Part 5 – Consequential amendments

  1. Paragraph 8 of Schedule 12 is self-explanatory.
  2. Paragraph 9 of Schedule 12 amends section 348 of FSMA 2000 to make the write-down manager a "primary recipient", which means certain provisions restricting the disclosure of confidential information in FSMA 2000 have effect in relation to the write-down manager.
  3. Paragraph 10 of Schedule 12 amends section 429 (2B) of FSMA 2000 to require that any regulations made by HM Treasury pursuant to the power in paragraph 3(4) or paragraph 9(3) of Schedule 19B be approved by Parliament.
  4. Paragraph 11 of Schedule 12 amends Schedule 1ZB to FSMA 2000 to ensure a member of staff of the PRA acting as a write-down manager is exempt from liability in damages for anything they do or omit to do in so acting.
  5. Paragraph 12 of Schedule 12 amends Part 1 of Schedule 1 of the Financial Services and Markets Act 2000 (Disclosure of Confidential Information) Regulations 2001 to ensure that a write-down manager appointed under section 377G can obtain confidential information where this information relates to the write-down manager’s functions concerning the write-down order.

Schedule 13: Insurers in financial difficulties: enforcement of contracts

Part 1 – New Schedule 19C TO FSMA 2000

  1. Paragraph 1 of Schedule 13 inserts new provisions into Part 24 of FSMA 2000 and a new Schedule 19C into FSMA 2000. Sub-paragraph 2 inserting the new section 377K into FSMA 2000 is self-explanatory. The effect of the provisions of the new Schedule inserted by sub-paragraph 3 are detailed below.

New Schedule 19C

Part 1 of new Schedule 19C: introductory
  1. Paragraph 1 is self-explanatory.
  2. Paragraph 2 explains for the purpose of Schedule 19C when an insurer is in financial difficulties (i.e., when Part 1 of Schedule 19B has effect in relation to the insurer, or where it is in administration or subject to a winding-up petition).
Part 2 of new Schedule 19C: policyholder surrender rights
  1. Paragraph 3 prevents policyholders exercising "surrender rights", or the ability to cancel a life insurance contract in exchange for its cash value, beyond a defined limit (‘the surrender limit’) while an insurer is in "financial difficulties" as defined in Paragraph 2.
  2. Paragraph 4 provides that restrictions on policyholder surrender rights extend to a policyholder’s right to switch between funds in accordance with the terms of a relevant contract of insurance ("switching rights").
  3. Paragraph 5 provides for consent to be given, by the court and certain other parties, to the surrender of an amount beyond the surrender limit. These parties may give consent if they are satisfied that not providing consent would cause hardship to the policyholder.
Part 3 of new Schedule 19C: termination of relevant contracts
  1. Paragraph 6 explains that contracts for goods and services, financial contracts (the meaning of which is defined further in sub-paragraphs (2) to (3)), and reinsurance contracts are "relevant contracts" potentially subject to the restriction on termination created by Paragraph 7.
  2. Paragraph 7 prevents relevant contracts, to which the insurer is a counterparty, terminating or being terminated by reason of the insurer being in "financial difficulties" as defined in Paragraph 2.
  3. Paragraph 8 provides for consent to be given, by the court and certain other parties, to the termination of contracts. These parties may give consent if satisfied that not providing consent would cause the counterparty hardship.
Part 4 of new Schedule 19C: exclusions and disapplication of this Schedule
  1. Paragraph 9 is self-explanatory.
  2. Paragraph 10 provides that the court may, by order, disapply or modify any of the provisions imposed by this Schedule in relation to one or more of an insurer’s contracts.
  3. Paragraph 11 specifies the applicants who may apply to the court to disapply the provisions imposed by this Schedule as provided for by Paragraph 10 and the procedural requirements that must be followed before an application can be made to the court.
Part 5 of new Schedule 19C: powers to amend this Schedule
  1. Paragraph 12 provides a power for HM Treasury to amend certain provisions in new Schedule 19C.

Part 2 – Consequential amendments

  1. Paragraph 2 amends section 429 (2B) of FSMA 2000 to require that any regulations made by HM Treasury pursuant to the power in paragraph 12 of the new Schedule 19C must be approved by Parliament.

Schedule 14: Credit unions

  1. This Schedule amends the Credit Unions Act 1979.
  2. Section 1 (3ZZA) introduces a new, optional object for credit unions. This is the section which allows credit unions to offer the new services specified in section 1ZA, should they choose to adopt this new object into their rules and subject to any relevant regulatory permissions.
  3. Section 1ZA outlines the services that fall under the optional object and the new powers HM Treasury has in relation to this new object. The services are hire purchase agreements, conditional sale agreements, and insurance distribution services. It also sets out that HM Treasury may specify future regulations relating to these objects.
  4. Section 1ZB grants HM Treasury powers to make regulations to amend section 1ZA relating to the new, optional object and the processes HM Treasury must go through to make the regulations. HM Treasury may add new activities to the optional object in future, and any amendments to the rest of the Credit Unions Act 1979 as needed, to support the new products or services. Before HM Treasury can add any further products or services under the new object, it must consult with people it deems appropriate, and it must secure approval for the additions from both Houses of Parliament.
  5. The amendments to section 2(3) specify that a society must be registered as a credit union provided it has, wholly or substantially, the mandatory objects, regardless of whether it takes on the new, optional object 3ZZA.
  6. Section 7 (5A) places restrictions in certain circumstances on members’ ability to withdraw shares held when they have taken out secured hire purchase agreements and/or conditional sale agreements with the credit union.
  7. Section 9A is amended to allow credit unions to charge for services ancillary to entering into a conditional sale agreement or hire purchase agreement.
  8. Section 11 clarifies that credit unions may offer loans to other credit unions, regardless of whether they have a membership link with the lending credit union. The lending must be repaid in six months or less. These loans are subject to the same interest rate cap as all other loans made by credit unions. This does not affect existing loans between credit unions.
  9. Section 11E details further provisions as to how credit unions may offer hire purchase agreements or conditional sale agreements. It specifies that credit unions may offer these services to their members if they have adopted the optional object into their rules. They may offer these products to corporate members provided that their rules allow them to enter into these agreements with corporate members, and provided that the aggregate, outstanding balances of the agreements with corporate members are no more than 10% of the aggregate outstanding balances of these contracts provided to members. This is to ensure that credit unions primarily remain focused on serving their retail members as mutual organisations. The 10% rate may be amended by HM Treasury.
  10. This section also specifies that credit unions must include in the terms of an agreement whether the borrower may withdraw any of their shares during the repayment period. Finally, it also outlines that these agreements are subject to a 3% interest rate cap, the same as credit union loans, and that HM Treasury may amend this rate.
  11. Section 11F details provisions for treating hire purchase agreements or conditional sale agreements as secured agreements.
  12. Section 11G introduces the terms under which a credit union may offer insurance distribution services to members and specifies that it may charge a fee as deemed appropriate for providing the service. This section also specifies that a credit union must have adopted the new object 3ZZA in its rules to carry out insurance distribution.
  13. Section 12(3) is amended to allow credit unions to hold an interest in land for the purposes of securing hire purchase agreements or conditional sale agreements.
  14. Subsection (5) of section 23A is omitted as it is instead moved into the "interpretation" section.
  15. The amendment to section 29 is self-explanatory.
  16. Section 31 is amended to provide definitions for the new financial activities included in the new, optional object 3ZZA. It also includes the definition of "enactment" which was removed from section 23A. Subsection (4) of this section requires credit unions to submit annual returns to the Financial Conduct Authority and requires credit unions to be subject to the year of account provisions in the Co-operative and Community Benefit Societies Act 2014.
  17. Schedule 1(9) is amended to require credit unions to outline the mode and circumstances in which loans to other credit unions, alongside loans to members, are made and repaid in their rules.
  18. A transitional provision is made to ensure that amendments to section 11 and Schedule 1(9) do not apply retrospectively to any loans credit unions may have made to another credit union before Royal Assent of this Act.
  19. A transitional provision is included to ensure that a credit union’s current year-end remains intact, and that the provisions for year of account do not apply retrospectively to previous years of account.

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