Question proposed, That the clause stand part of the Bill.

Given that the Minister is in listening and answering mode, I want to ask a couple of questions about Clause 3. In general, the Opposition have no problem with the clause, which amends section 3I of the Financial Services and Markets Act 2000 to allow the PRA to require the FCA to refrain from certain action if the PRA believes that such action would

“threaten the continuity of core services”.

As we discussed in relation to clause 2, it is important to have clarity on the distinct roles and powers of the PRA and the FCA, with a view to preserving the continuity of core services in the event of a crisis, and the Minister has taken that on board.

For the record, will the Minister give us some examples of scenarios in which the PRA might want the FCA to hold back from Intervention? I see some Government Members nodding in agreement, which I take as a sign that they also consider the question to be important. Which of the FCA’s routine activities on the provision of core services will the PRA be able to supersede? In terms of ensuring transparency, and renewing and restoring public confidence, will any overrule of the FCA be made public? Who will know that that has happened and when it happened? Will Parliament or the Treasury Committee be able to find out about such circumstances, and if so, how? I hope that the Minister will be able to answer those points.

The Financial Services and Markets Act 2000 already gives the PRA a veto over a variety of the FCA’s activities, and Clause 3 simply extends that veto.  Given that the objectives of the PRA and the FCA now include the continuity objective for the provision of core services, we need to extend the veto to cover that objective. Not only is clause 3 in the spirit of FSMA, but it would create an anomaly not to extend the financial stability powers that FSMA gives the PRA over the FCA to cover the new objective. The clause allows the PRA to exercise a veto on the grounds that a particular activity threatens the continuity of core services.

The hon. Lady asked for examples. Such a power is to be used in a bespoke way for particular institutions if, in the judgment of the PRA, there is a threat to the continuity objective—in other words, to the stability of the banking system in the UK—but the nature of such matters makes it difficult to specify precisely what they might be. The whole reason for creating a forward-looking and more agile set of institutions is to allow a greater opportunity to spot things that are coming up.

If the Minister gives an example, that might answer my question. In discussion of previous clauses, some concern was expressed about vagueness. I simply seek to understand, and to put on the record, the types of circumstances in which such a power would be used.

The power would be used if, in the judgment of the PRA, a proposed action by the FCA would affect the continuity objective, which is to say that it could trigger a rupture in the continuity of banking services to the people of this country. Let me give an example. Suppose, on conduct grounds, the FCA were to propose immediately to ban particular products and the PRA were to judge that that would cause, perhaps because of the associated revenues, an immediate problem for the funding position of a bank. The judgment then has to be weighed up as to whether the necessary in due course requirements to change the way in which products are sold, or the products themselves, can be reconciled with the stability of the group. It is for the PRA to state and to certify that that, in its judgment, would threaten the continuity objective. In those circumstances, it would have the ability to stay the hand, as it were, of the FCA.

I thank the Minister for giving way once again. He has obviously thought about the matter in detail. He provides the example of where products may have to be banned. What does he have in mind? From past experience or looking to the future, does he have any particular concerns?

I do not have any particular product in mind, but one can imagine a circumstance in which a product is important to a bank’s current trading position and balance sheet. The purpose of getting banks to be more robust and to have better provision for capital, for which the Bill provides, is to reduce the circumstances in which the measure may be necessary, but it is theoretically possible that the sale of a particular product may be sufficiently important to a bank’s trading position that to interrupt it immediately could have consequences for its funding position and stability. The proposal is not expected or intended to be used frequently. Indeed, it is not intended to be used at all, as the Bill provides for greater resilience in the banking system.

However, as all hon. Members would accept, if there were a circumstance in which the perfectly proper in due course restrictions for conduct reasons of a bank engaging in a particular activity were to have, without regulators being able to do anything about it, huge and disproportionate consequences for the banking system, it is right to have the ability—it is why the two institutions were created—to have such questions available for separate determination. In those circumstances, the stability of the system and of the continuity objective has to—

That has serious consequences for the consumers of financial products. If the agencies are working together to sustain a bank, but consumers are using a rogue product, how will that work? It really is a serious point.

The hon. Gentleman is right. We debated the arrangements for co-operation between the FCA and the PRA under the previous Clause, and those arrangements are there to ensure that any prospective risk to the financial stability of one of the conduct aspects for which the FCA is responsible is made known to the PRA. Consequences can then be reflected back. The hon. Gentleman is absolutely right that the situation should never arise. The PRA ought to have, and is required to have at all times, a view as to the solvency and resolvability of the banks. However, if it came to the crunch and a bank was of such systemic importance that it would interrupt the PRA’s continuity objective, the action could not be indeterminate. There must be the ability and—the hon. Gentleman is quite right—FSMA establishes the precedent that the PRA has a veto in such matters over the FCA’s decisions.

Another thing that the PRA could do, for example, is to delay the imposition of a fine that the FCA might have determined was appropriate to levy on a particular firm. If the imposition of that fine with immediate effect would jeopardise the immediate position of the firm and drive it into failure, that is something that needs to be addressed. It does not in any way protect the institution from the consequences of its action, but it allows the PRA to take a view as to whether, in this case, the timing would be deleterious. That is the purpose of the Amendment.

The Minister talked earlier on about a memorandum of understanding between the two institutions, and that was important, but he was not able to respond to a question from my hon. Friend the Member for Kilmarnock and Loudoun about the parliamentary oversight of the working between the two institutions. Could he tell us a bit more about that please?

In relation to the oversight, the provisions in FSMA are, for these matters, not to be made public because to communicate the fact that, for example, it was necessary to delay the payment of a fine because otherwise a bank could fail, would be to release information that was very highly sensitive to the markets. It could trigger precisely the kind of reaction that these powers exist to prevent. Members of the Committee will know that the constitution of the PRA—through the Financial  Services Act 2012—requires reports of its activities to be made retrospectively to the various committees of the Bank and the Select Committee that scrutinises the PRA. In due course, they will have the opportunity to review the policies and practices of the PRA, but in regard to the exercise of this power, to do what the hon. Member for Blaenau Gwent implies or what was, perhaps, behind the perfectly reasonable question from the hon. Member for Kilmarnock and Loudoun—to simultaneously publicise the exercise of this power; tempting and desirable in principle though it is—would have the perverse consequence that must be obvious to all.

The memorandum of understanding, of course, is subject to parliamentary scrutiny: it is laid before Parliament and subject to scrutiny by the Select Committee. Therefore, the arrangements in advance and the types of circumstances in which the PRA would exercise these powers are set out in advance and are subject to clear public scrutiny and should be agreed. The particular moment of exercise, however, is something that has to be between the regulators.

My right hon. Friend will forgive me if I should probably know the answer to this, but where the PRA exercises this right, what will be the precise role of the Treasury? What will be the roles of the Chancellor of the exchequer and the Financial Secretary himself?

All these matters concerning the ability of the PRA to veto the activities of the FCA were considered and debated during the passage of the Financial Services Bill. We need to beware in our discussions of this Bill of the possibility of doing something to misalign that Act, which was considered and put into force, including the arrangements for the exercise of the power in question. It is important that through this Clause, we should simply reflect on making a concomitant change to the powers of the PRA in respect of the exercise of the veto to mirror the proposed extension of the change in the objectives of the PRA. I think my hon. Friend is a veteran of that Bill committee, and he will know that there is no role for the Treasury in that; it is a matter for the regulators to decide.

It is possible to rerun the debates about the prospective powers of the PRA and the FCA across the board, and we can do that if that is what the Committee wants, but we need to bear in mind that this change that reflects a tweak to the institution’s continuity objective.

I do not wish, as I am sure other hon. Members do not, to rerun the whole debate that took place on the previous Bill. However, my hon. Friend the Member for Blaenau Gwent made an important point about what the memorandum of understanding covers. I am still unclear about how the Treasury Committee would find out about the circumstances in which the overruling would take place. The Minister has made it clear that that would not be publicised, and I can understand the reasons why, but I am not entirely clear about the process by which the Treasury Committee and Parliament would be able to scrutinise the workings of that.

The memorandum of understanding is scrutinised in advance by Parliament. The Select Committee has the opportunity to suggest in public the inclusion of  specific circumstances in which the powers are exercised. The reviews of the PRA’s performance by the Bank of England and the Treasury Committee can be concerned with ex post scrutiny or knowledge of decisions that the PRA has taken in pursuit of the objective. The Treasury Committee can request, from time to time, a report on whether and when the powers have been used. It would be a reasonable judgment by the PRA to disclose them once the moment of danger had passed, but the arrangements are available.

Proposed new subsection (c) contains the phrase

“threaten the continuity of core services provided in the United Kingdom.”

Can that be read to include threatening the continuity of core services provided in a distinct part of the United Kingdom? Can it only be read as being about the UK as a whole, or can it apply to part of the UK where there is a distinct banking market that does not have the same range of players? Indeed, some players may well be shaken out of it, given the changes in Irish banking and so on. The Clause is meant to deal with future-proofing and risk anticipation. Could it lead to the PRA requiring the FCA to refrain from products in a particular regional banking market, because there could be implications for other existing banks and their core services? Could the provision apply to a distinct part of the UK, as such an issue could arise in Scotland and certainly does arise in the context of Northern Ireland?

The hon. Gentleman makes an important point. Before I respond to it, let me provide further clarification on some points made about the disclosure of information on decisions and directions that the PRA has made. The PRA is required to include information on directions under section 3I of FSMA in its annual report, which is laid before Parliament. Therefore, there is the ability annually to scrutinise the directions that have taken place.

The hon. Gentleman asked about the continuity objective, regarding particular parts of the United Kingdom. Clearly, the intention is that ordinary people should have continued access to their deposits. It is for the regulator to interpret that and, through the statutory instruments that implement the objective, we will set out the provisions in detail. However our view is that the area of the UK that he represents, and other areas such as Scotland, would be considered significant because an interruption in the continuity of service there would constitute a breach of the continuity objective.

I had not anticipated that we would have so much debate and discussion about those points, but I am glad that we have been able to get some clarity on issues that concern me and other hon. Members. In particular, it is helpful to have a reminder about the requirements regarding the PRA annual report, which the Minister mentioned.

It is also helpful to have had the Minister’s assurances about the memorandum of understanding and about the Treasury Committee’s potential role in requesting information and reports. No one is suggesting that  Select Committees, or indeed Parliament, would want to do anything that caused further problems, but it is important that there is a degree of oversight so that Select Committees and Parliament have the ability to scrutinise. It is also important that they have the ability to give information and suggestions about how processes may be approved.

I recognise that the Clause essentially does something that has already been done in other legislation, but it was important to put those points on the record. On that basis, however, I have no difficulty with the clause standing part of the Bill.

Question put and agreed to.

Clause 3 accordingly ordered to stand part of the Bill.