Part 1: Regulatory Framework Powers in relation to critical third parties Section 18: Critical third parties: designation and powers
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.
	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)).
	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.
	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.
	Subsection (5) prevents the Bank of England from being designated as a CTP.
	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.
	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.
	Subsection (2) clarifies the regulators’ objectives for this purpose.
	Subsection (3) applies and adapts the existing FSMA 2000 provisions containing the regulators’ rule-making powers over authorised persons for the CTP regime.
	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.
	Subsection (2) sets out procedural requirements for a direction.
	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.
	Subsections (7) to (9) are self-explanatory.
	New section 312O sets out further procedural matters for a direction under 312N.
	Subsection (1) provides that the relevant regulator must give written notice to a critical third party.
	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.
	Subsection (3) requires no further explanation.
	Subsection (4) sets out the matters a notice must contain.
	Subsection (5) enables the relevant regulator to extend the period of notice it provides for a critical third party to make representations.
	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).
	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.
	Subsection (8) ensures that the critical third party is notified of its right to refer the matter to the Tribunal.
	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.
	Subsection (10) applies existing rules as to whether a matter can be referred to the Tribunal.
	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.
	Subsection (1) applies the existing FSMA 2000 information-gathering and investigation provisions to CTPs.
	Subsection (2) adapts the language in those provisions to the CTP regime.
	Subsection (3) enables the regulators to delegate the power to request information to their members of staff.
	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.
	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).
	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.
	Subsection (7) restricts the regulators’ power of investigation to those cases where it appears that a CTP may have contravened a requirement.
	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.
	Subsection (10) provides definitions.
	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.
	New section 312R sets out disciplinary measures available to the regulators under the CTP regime.
	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.
	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.
	Subsection (3) ensures that disciplinary measures can be tailored to the contravention and are appropriately proportionate.
	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)).
	Subsection (5) sets out that notices can be varied or withdrawn, including on application by the CTP concerned.
	Subsection (6) requires no further explanation.
	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)).
	Subsection (8) brings a breach of these disciplinary measures into the existing offences framework of FSMA 2000.
	Subsection (9) requires no further explanation.
	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.
	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.
	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)).
	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)).
	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)).
	Subsections (2) to (6) require no further explanation.
	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)).
	New section 312W disapplies certain sections of FSMA 2000 (which have already been re-cast above) for the purposes of the CTP regime.