Policy background
The Financial Services Act 2012 ("the 2012 Act") replaced the ‘tripartite’ system of financial regulation with a new system that put the Bank at the centre of the system, giving it a number of new responsibilities and powers. The 2012 Act gave the Bank responsibility for macro-prudential regulation through the establishment of the FPC. It also gave the FPC a key role in safeguarding the UK’s financial stability by identifying, monitoring, and taking action to address systemic risks to the UK financial system. The 2012 Act also established the PRA as a subsidiary of the Bank. The PRA has specific responsibility for ensuring effective micro-prudential regulation of all deposit takers, insurers, and large investment firms.
	The Act seeks to simplify further and strengthen the governance of the Bank and the PRA, and to increase the transparency and accountability of the Bank.
	The Bank’s governance model is determined by statute. The governing body, the court of directors ("the court"), is responsible for managing the affairs of the Bank, other than the formulation of monetary policy, and is accountable for the Bank’s performance in relation to its objectives. The Government and the Bank have made continuous improvements to the court’s structures and processes since 2012, most recently requiring minutes of its meetings to be published. A review commissioned by the Governor of the Bank into the Bank's practices on transparency, particularly in relation to the work of the MPC, was carried out by Kevin Warsh. The report of that review, "Transparency and the Bank of England's Monetary Policy Committee" ("the Warsh Review"), was published on 11 December 2014. At the same time the Bank announced a number of other measures it wished to take to improve its transparency and accountability. This Act amends the Bank of England Act 1998 ("the 1998 Act") to enable the Bank to implement these measures, building on action the Bank has already taken.
	The Act changes the membership of the court, adding an additional Deputy Governor, and assigns the oversight functions to the full court to enable the court to operate more like a unitary board. The 2012 Act established the FPC as a sub-committee of the court responsible for identifying, monitoring and taking action to address emerging risks and vulnerabilities across the UK financial system as a whole. By making the FPC a committee of the Bank, the Act simplifies the governance structure within the Bank, with all the policy committees established as committees of the Bank. The Act makes changes to the operation of the MPC, to implement the recommendations made by the Warsh Review.
	The Act aims to strengthen the Bank’s accountability to the public and to Parliament, by giving the Comptroller and Auditor General the power to initiate value for money studies in relation to the whole of the Bank, following consultation with the court.
	The Act is also intended to clarify the responsibilities of the Bank for prudential regulation by transferring the PRA’s functions to the Bank. The PRA's brand and objectives will remain unchanged and the Act contains safeguards to ensure that the Bank's functions as PRA must be operated independently from the Bank's resolution functions, to comply with EU legislation and the Basel Core Principles on Supervision. It also provides that any newly appointed chief executive of the FCA must have appeared before the Treasury Select Committee before taking up his or her appointment in recognition of the importance of the role of that Committee in scrutinizing appointments to this position at the FCA. It also amends the regulatory principles which apply to the FCA and the PRA.
	The Bank has primary operational responsibility for resolving banks and other financial institutions when they fail. However, the Chancellor of the Exchequer and the Treasury have responsibility for any decision involving public funds. The Act seeks to enhance the powers of the Treasury to ensure that public funds are applied appropriately in a financial crisis by imposing new obligations on the Bank to provide the Treasury with information on proposed resolution options being considered by the Bank, and by enhancing the Treasury's powers to obtain additional information from the Bank in relation to the implications for public funds of the failure of a bank or other financial institution.
	At present, the Approved Persons Regime ("APR") in Part 5 of FSMA is the main way in which individuals in the financial services industry are regulated. In its final report, "Changing Banking for Good"[1], the Parliamentary Commission on Banking Standards ("PCBS") raised concerns about the existing APR and made a number of recommendations for change including the introduction of a new regime for regulating senior persons in the banking industry, new arrangements for ensuring that more junior staff are fit and proper, and provisions enabling the regulators to make rules of conduct applying to staff other than approved persons. The Government broadly accepted these recommendations[2] and used the Financial Services (Banking Reform) Act 2013 ("the 2013 Act") to put in place the Senior Managers and Certification Regime ("SM&CR").
	The PCBS considered that the deficiencies they had identified in the APR would not be confined to banking. However, they were concerned that attempting to change the APR for the whole financial services industry would risk delaying the introduction of reforms. The Government shared those concerns and limited the substantive reforms in the 2013 Act to banks, other deposit takers and those investment firms that are regulated by the PRA. The SM&CR came into operation for those financial services firms on 7 March 2016. From 9 November 2015, the SM&CR also applied to UK branches of corresponding foreign institutions[3].
	The experience and feedback gained from developing the detailed measures needed for implementation of the SM&CR, mainly rules made by the regulators, indicates that the SM&CR should deliver the improvements in conduct and performance of key bank staff that the PCBS and the Government were seeking. The Government therefore considers that it is appropriate to legislate to extend the SM&CR to all types of financial services firms. The Government has taken this opportunity to make amendments to the SM&CR. The regulators will remain responsible for developing the detailed measures in their rules.
	On 1 April 2014, the Government reformed consumer credit regulation, transferring responsibility from the Office of Fair Trading to the FCA and bringing the regulation of consumer credit activities into the framework established by FSMA. The intention was to create a more robust regulatory regime which strikes the right balance between protecting consumers and ensuring regulatory burdens placed on firms are proportionate.
	Following the reforms to consumer credit regulation in 2014 the funding of the Illegal Money Lending Teams and Scottish Illegal Money Lending Unit that lead in taking action against loan sharks remained with the Department for Business, Innovation and Skills. This amendment puts that funding on a new, clear and stable basis, with a levy raised from the consumer credit industry to pay for the cost of policing the regulatory boundary.
	The money laundering provisions in the Act intend to ensure that the UK’s anti-money laundering and counter-terrorist financing regime is robust, proportionate and sensible so that it is effective.  Resources are to be focused on higher-risk areas and individuals, in line with international and European commitments.
	The Act also gives the Treasury power to make regulations providing for transformer vehicles, which are companies and other undertakings used, particularly by insurers and reinsurers, to mitigate risk by assuming risk from another undertaking and funding the vehicle’s exposure to that risk by issuing investments. In the March 2015 Budget, the Chancellor of the Exchequer committed to implementing a new and competitive framework for Insurance Linked Securities business. This provision is part of the Treasury’s project to fulfil that commitment.
	In April 2015, the Government introduced greater flexibility for pensions products, removing tax penalties which applied to the use of pension funds other than for the purchase of an annuity. A new Government service, Pension Wise, was introduced with the aim of providing guidance to people approaching retirement and helping them understand the options available for using their pension funds. As part of the pension flexibilities, the Government provided for an 'advice safeguard' which provides that trustees and managers must ensure that members of pensions schemes have received appropriate independent advice before they transfer or convert safeguarded benefits - which are certain valuable categories of pension benefit such as defined benefit pensions, and pensions with Guaranteed Annuity Rates - into flexible benefits.
	From 2017, the options available for the use of pension funds will be extended further by allowing people who have already bought an annuity to sell their annuity income to a third party. Since the current remit of Pension Wise is tightly defined, primary legislation is required to allow Pension Wise to deliver guidance for the secondary annuity market. This Act intends to enable the Government to extend the Pension Wise service to cover holders of annuities specified by the Treasury. The Act also imposes a requirement on the FCA to make rules requiring specified authorised persons to check that individuals with annuities of a certain type or value have received appropriate financial advice before selling their annuity income on the secondary market.
	Following the Government’s consultation Pension Transfers and Early Exit Charges[4] in the summer of 2015, and evidence gathering exercises undertaken by the FCA and the Pensions Regulator, the Government concluded that it was necessary to act to limit the early exit charges that some people face when accessing their pension savings early under the pension freedoms. Consequently, the Act provides for a new duty on the FCA to make rules to prevent the imposition of specified early exit charges on members of FCA-regulated pension schemes.
	The Act provides the flexibility to change which legal entities are authorised to issue commercial banknotes in Scotland or Northern Ireland. The Banking Act 2009 ("the 2009 Act") restricts the permission for banks to issue banknotes only to those banks who had that permission immediately before that Act came into force. Part 6 of that Act was intended to deliver the Government policy of supporting the continuation of the long-standing tradition of certain Scottish and Northern Ireland banks being able to issue their own banknotes, whilst not allowing for new issuers to emerge. However, the Government believes that inflexibility in the current legislation can cause problems when a bank wants to restructure its operations. In these circumstances, the permission to issue banknotes cannot be moved to a different legal entity, except by legislation, even if they are within the same group structure. The Act provides a power for the Treasury to make regulations authorising a bank in the same group as an existing issuer to issue banknotes instead of that issuer.