It is a pleasure to serve under you, Mr Vickers, during this quiet week in politics. The regulations that we are introducing today will ensure effective, proportionate regulation for the financial services sector, first, by reforming the ringfencing regime to be more flexible while upholding financial stability safeguards; secondly, by creating a new framework for the regulation of short selling; and thirdly, by enabling better supervision and enforcement of designated activities under the Financial Services and Markets Act 2023.
I will turn first to the reforms to the ringfencing regime for banks. As the Committee will know, ringfencing was introduced following the global financial crisis on the recommendation of the Independent Commission on Banking, and it came into full force in 2019. It requires large, complex banks to separate the services that they provide to households and small and medium enterprises from investment banking activity.
In 2022, an independent statutory review of the regime recommended updates to ensure that it operates as intended and is proportionate. This statutory instrument improves the regime and implements changes from the review. The reforms that it contains will improve competition in the banking sector, reduce costs and support economic growth. They have been developed with the Prudential Regulation Authority, which is content that they also maintain appropriate financial stability protections.
I will outline the most material updates to the regime. The reforms will ensure that in future only the largest, most complex banks are subject to the regime, with two key changes. The first is an increase in the primary deposit threshold—the amount of core deposits a bank can hold before it is required to ringfence—from £25 billion to £35 billion. This accounts for growth in the deposit base and other relevant economic indicators since ringfencing was introduced and it supports competition. The second change is the introduction of a new secondary threshold, which exempts retail-focused banking groups from the regime, where investment banking activity accounts for less than 10% of common equity tier 1 capital.
This SI also makes changes to the way that banks within the regime can operate. It introduces measures to encourage more investment by ringfenced banks in UK small and medium enterprises and to reduce the compliance burden associated with the regime. It also creates significant new flexibilities to allow ringfenced banks to operate globally, subject to PRA rules, as well as to provide a wider range of goods and services to their customers.
I turn to the draft Short Selling Regulations. Short selling is the practice of selling a security that is borrowed or not owned by the seller with the intention of buying it back later at a lower price to make a profit. Short selling plays a healthy role in the proper functioning of financial markets. It provides essential liquidity to markets, which drives investment in British companies; it helps to drive economic growth; and it helps to ensure that investors pay the right price when investing in shares.
The draft regulations introduce a more streamlined UK short selling regime, which focuses on equities, rather than both equities and sovereign debt. The new regime also introduces a reformed public disclosure regime for short selling, ensuring that there is transparency over short selling activity, without the issues identified with the current regime through the 2022 call for evidence.
However, as I am sure the Opposition spokesperson will identify, there can be risks associated with short selling. As such, it is important for the Financial Conduct Authority to have the tools to effectively monitor short selling activity and intervene if necessary. This statutory instrument provides the FCA with broad rule-making powers in relation to short selling. This will allow the FCA to effectively oversee short selling in UK markets. It will also mean that the UK’s short selling rules can be adapted and updated by the FCA in a more agile way in future—for example, to better adapt to new global standards or to take account of market innovation and new business models. The instrument retains the FCA’s powers to intervene in relation to short selling activity in UK markets in exceptional circumstances, which is an important feature of the current regime.
Turning to the Financial Services and Markets Act 2000 (Designated Activities) (Supervision and Enforcement) Regulations 2024, to give the FCA the broad rule-making powers for short selling that I just mentioned, the new short selling regime operates under the designated activities regime—known as DAR. The DAR was introduced into the Financial Services and Markets Act 2000 by the Financial Services and Markets Act 2023, which the Opposition spokesperson will know very well, since we sat across from each other, debating it for days. It allows the Treasury to designate certain activities to be regulated by the FCA. However, persons carrying on those activities under the DAR do not need to become full authorised persons like banks or insurers. This enables proportionate regulation for activities where it would be disproportionate to have met all requirements for authorisation.
The Financial Services and Markets Act 2000 (Designated Activities) (Supervision and Enforcement) Regulations 2024 enable the FCA to supervise and enforce the rules it makes under the DAR. They do this by enabling the FCA to exercise existing supervision and enforcement powers under FSMA 2000 on persons carrying out designated activities, whether or not they are authorised. In the first instance, these powers will be extended to the activities covered by the Consumer Composite Investments (Designated Activities) Regulations 2024 and the Short Selling Regulations 2024. Tha will enable effective supervision of these regimes.
I thank the Committee for putting up with these quite technical amendments. The statutory instruments ensure that our financial services industry is subject to a rulebook that is fit for purpose, more proportionate and tailored to UK markets. I hope the Committee will join me in supporting these regulations.