The Financial Services and Markets Act 2000 (Excluded Activities and Prohibitions) Order 2014 and an explanatory memorandum have been published on the legislation.gov.uk website.
Section 4 of the Financial Services (Banking Reform) Act 2013 inserts a new Part 9B into the Financial Services and Markets Act 2000 (FSMA) providing for ring-fencing. Those UK institutions which carry on one or more core activities (defined in the new section 142B of FSMA as the regulated activity of accepting deposits, subject to any exceptions provided for by HM Treasury by Order) will be ring-fenced bodies. As such they will not be permitted to carry on excluded activities, defined in the new section 142D of FSMA, or do anything prohibited by HM Treasury under section 142E. Section 142D defines a single excluded activity – the regulated activity of dealing in investments as principal, except in circumstances specified by HM Treasury. This Order provides for a number of cases in which ring-fenced bodies are to be permitted to deal in investments as principal, and imposes a number of prohibitions (subject to exceptions) on what ring-fenced bodies may do.
The Order creates exceptions to excluded activities in that it permits ring-fenced bodies to:
- deal in investments as principal for the purpose of reducing its exposure to specified risks, including interest rate, currency and liquidity risk;
- trade with central banks; and
- sell a narrow range of simple derivatives to their customers, such as interest rate swaps and simple foreign exchange options.
To protect ring-fenced bodies against intra-financial contagion, the Order prohibits them from having exposures to other financial institutions outside their own corporate group, including non-ring fenced banks, investment firms, systemic insurance firms and investment funds. This prohibition is subject to certain exceptions in that ring-fenced bodies may have exposures:
- for the purpose of managing their own risks, analogous to the exception from the excluded activity of dealing in investments as principal;
- to other financial institutions for the purpose of providing trade finance services; and
- arising from the provision of payments services to other financial institutions, subject to any requirements imposed by the regulator.
In addition to the prohibition on financial institution exposures, the Order prohibits ring-fenced bodies from establishing branches or subsidiaries (except for service companies) outside the EEA.
The Order was made on 23 July 2014. Articles 1, 2 and 3 and the Schedule to the Order come into force on 1 January 2015. The other provisions of the Order come into force on 1 January 2019.