Supplementary memorandum from the Financial
Services Authority (FSA)
1. This memorandum is submitted by the Financial
Services Authority as a follow-up to the oral evidence given by
Adair Turner and Hector Sants on 25 February.
2. The memorandum provides answers to the specific
questions the Committee asked on:
the number of individuals in senior
positions who we found not to be fit and proper in the past;
our remuneration policy;
our current salary scale ranges;
the number of individual consumer
complaints we have received in the last five years;
information on the stress testing
we have undertaken; and
how the anti-money laundering "know
your customer" requirements apply to non-UK residents.
3. The Financial Services and Markets Act
2000 (FSMA) has made provision for the FSA to require individuals
performing certain roles to seek approval to perform a controlled
function. We have determined which roles should be defined as
controlled functions in our Handbook. These controlled functions
are divided into groups and are Governing Functions, Required
Functions, Systems and Controls Function, Significant Management
Functions; and Customer Functions. The first four groups of functions
are collectively known as Significant Influence Functions reflecting
the roles that have a significant influence over the decisions
and strategy of a corporate entity.
4. There are three main outcomes in the
applications for an individual to perform a controlled function:
authorisation/approval; refusal; or withdrawal of the application.
Since 1 December 2001 (the date when the FSA became the UK's single
financial regulator), approximately 51,700 applications to perform
significant influence functions within existing authorised firms
were processed. 616 of these were identified as requiring detailed
investigation because of adverse information or apparent fitness
and propriety issues, and were subject to close scrutiny. Of those
616, four significant influence functions were refused, with a
further 75 being withdrawn (representing 13% of the significant
influence function applications receiving closer scrutiny). A
substantial number of these withdrawals will have resulted from
the detailed investigations carried out.
5. The total remuneration of our staff comprises:
core benefits (eg 20 days' holiday
and life assurance);
flexible benefits (eg additional
holiday, and child care vouchers);
non-contributory pension; and
performance-related payment (up to
35% of salary in 2008).
6. During 2008 we reviewed our total reward
offering, taking into consideration all elements of reward and
comparing against the external market. It is vital that, with
increasingly challenging external market conditions, our reward
strategy supports the objective of further improving and maintaining
the quality of our staff by ensuring that total reward remains
appropriate, competitive and is aligned with the relevant external
market. The intended outcome from the delivery of new rewards
is to ensure that total rewards offered are appropriate and reflect
an individual's contribution, skills and performance.
7. The overall aim of the new strategy is to
ensure that all staff are on a common reward platform and to ensure
a more equitable distribution of reward spend. The philosophy
behind this is to ensure competitive and market aligned total
remuneration and will provide transparent links between skills,
contribution, performance and reward. It allows for increased
flexibility in the targeting of pay awards and performance-related
awards at individuals. The specific ranges for the individual
performance rewards for each year are decided at the end of the
previous year. For 2008, as we informed the committee, the range
is 0-35%. This will also be the range for 2009.
8. In March 2009, we began a 90-day consultation
period on a proposal to cease future accrual in the final salary
section of the pension plan. The consultation period ends on 2
June, after which our Board will decide whether to implement the
9. We do not have one pay structure that covers
all employees. Instead we use a broad "job family" structure
that provides salary ranges. These salary ranges are used to group
roles of similar skills and content under the same generic heading
which we call job families. We have 12 job families.
10. Appendix A includes the FSA job families
and their salary ranges.
11. The FSA has a published redundancy policy
which applies to all staff that may become displaced due to changes
in the content of their role. Where an employee is made redundant
and we have been unable to offer alternative employment, a compensatory
payment calculated according to the formula below will normally
When there has been service of more
than six months and less than two years. A sum equivalent to 13
When there has been service of more
than two years. A sum equivalent to 13 weeks salary minimum, plus
(for all service in excess of two years):
two weeks for every complete
year of service in excess of two years.
0.5 week for every complete
year of service over age 40 and under age 45.
one week for every complete
year of service over age 45 and under age 50.
1.5 weeks for every complete
year of service over age 50.
12. As set out in our redundancy policy, all
compensatory payments in excess of statutory redundancy pay are
subject to an individual accepting a compromise agreement. For
senior staff these are agreed by our Remuneration Committee.
13. Members of the FSA Pension Plan who are
made redundant, will retain preserved rights in the Plan calculated
in accordance with its Trust Deed and Rules. Eligible employees
over the age of 50 can also apply for immediate payment of pension
on an actuarially reduced basis. We will automatically agree to
such an application on an "Active Member" basis and
seek Trustee approval. Under these arrangements, any benefits
payable in respect of service with a prior organisation will be
paid in accordance with the rules of that scheme. Core and flexible
benefits cease on the date of termination of employment.
14. Clive Briault's remuneration payment was
detailed in our Annual Report 2007/8. During the financial year,
the Remuneration Committee approved the financial settlement paid
to Clive Briault on his departure from the FSA on 30 April 2008.
The settlement was included in the remuneration table outlined
in the Annual Report for the year 2007/8 because the FSA was contractually
liable to those terms from 13 March 2008. The departure payment
comprised £356,452 in respect of salary and bonus, £36,000
in respect of pension contributions and £202,500 in respect
of compensation for loss of office. In addition, external professional
fees of £17,500 plus VAT were approved for payment.
15. We have received 2,127 consumer complaints
between 1 April 2004 and 27 February 2009. This figure includes
723 Bank Charges Waiver Cases and 477 cases about our actions
in the case of an alleged unauthorised collective investment schemeKF
16. We have always espoused the importance of
stress testing as part of a well functioning risk-management process
(a view that is enshrined in the Basel II capital process) and
in our own risk management we carry out an extensive stress-testing
programme. We carry out three different types of stress test:
(a) Parameter Shiftthe simplest kind
and a necessary building block for scenarios (see later). This
involves taking a single parameter (eg the rate of unemployment)
and moving it. The impact the change has will depend on the transmission
mechanism we build, which will include amongst other things how
sensitive our risk profile is to the change in parameter. In some
cases we can estimate the sensitivity and transmission mechanism
from data that firms submit to us. In other cases this is a judgement-based
(b) Scenariosthese are, in effect
stories that are made up of multiple parameter shifts often over
a defined time period. Scenarios can become quite complex, once
more than one parameter moves we need to think about how one parameter
affects the otherin other words we need to consider "correlations".
Again, where possible we use data to provide estimates and we
place heavy reliance on our Oxford Economic Forecasting and National
Institute economic models. For all their complexity, however,
the main advantage of scenarios is that they are easier to relate
to. In our work we have looked at scenarios as varied as a collapse
of the internet and an avian flu pandemicto a disruption
in the hydrocarbon sector. More recently our stress scenarios
have focused more on economic stresses. We have considered a range
of domestic and global economic outcomes. Some of these were published
in our recent Financial Risk Outlook. There we outlined three
alternative scenariosthe first a successful application
of policy and a relatively rapid recovery from recession, commonly
described as a "V"-shaped recovery (referring to the
shape of the GDP curve). The second was a deeper recession, where
recovery would take longermore a "U"-shaped recovery.
Finally we considered the impact of stagflationin essence
the impact of a monetary policy dilemma where the needs to control
inflation and promote growth may conflict. We have additionally
considered the impact of more individual shocks, for example,
severe equity moves.
(c) Historical simulationsthese stress
tests re-run an actual stress. The main advantage of this being
that there is no shortage of data on parameters and correlations.
There principle weakness is that the world (particularly the financial
one) moves on and as such we need to interpret results more carefully.
For example the growth of internet and telephone banking has significantly
reduced the cost of moving deposits. Despite this drawback we
have been re-running various versions of the 1980s and 1990s recessions
to test the vulnerabilities of our banks and insurance companies.
17. For each individual firm we take this generic
approach and customise it. We believe that publishing these individual
scenarios could be damaging to market stability and release commercially
sensitive data. Therefore, it is not our intention to publish
18. Neither the Treasury's Money Laundering
Regulations nor our Handbook prohibits a firm from taking on a
UK citizen who is not resident in the UK as a customer. The same
is true of guidance written for the financial services industry,
by the financial services industry, and which is formally approved
by the government (the JMLSG Guidance).
19. The Treasury's Money Laundering Regulations
require firms to know their customer. The JMLSG Guidance sets
out how firms should identify their customer and which aspects
of their identity they should verify. There is a section in the
Guidance on customers who are non-resident, not physically present
in the UK, wishing to open a bank account. This section explains
what firms should consider when dealing with such applications:
for example, it states that a firm should apply enhanced due diligence
where the customer is not met personally or where other high risk
factors come into play. It does not, as noted above, suggest that
firms should refrain from entering into a business relationship
with a UK citizen not residing in the UK.
20. Ultimately, it is a firm's decision about whether
to take on a customer and money laundering risks are likely to
be just one of the factors that they will consider.
21. We attach in Appendix B the British
Bankers' Association's research which Hector mentioned in our
oral evidence and which suggests that some banks are offering
accounts for UK citizens located offshore.
6 March 2009
FSA Job Families can be found on the FSA's website
SELECT BBA MEMBERS'
FSA/HMT QUESTIONS ON
Question 1: Would you/do you open accounts with
your UK entities (as distinct from offshore entities) for people
who are not resident in the UK?
Bank 1"We would not open an account
for customer who is not resident in the UK within UK retail banking."
Bank 2"For Non-UK residents, our
websites do not currently permit individuals to progress, in line
with the European Commission's findings to date. We do however
offer an account to non-residents, with limited features. This
product is a cheque book based high rate investment product aimed
at high balance and low activity. It requires a minimum investment
We also offer an account for students moving
to the UK who require a new bank account. It offers an ATM card,
Visa Electron debit card, direct credits, standing orders, direct
debits, bill payment, online and telephone banking, and withdrawals
from Post Office counters. It does not however offer overdraft,
cheque guarantee card, or cheque book facilities."
Bank 3"Yes, but they are subject
to our usual identification process (ID) and verification of address
(VA). We do require the appropriate documentation to be presented
to one of our offices in the UK before we open the account. Depending
upon the product requested credit review and decision will also
We have a product designed specifically for
non UK residents who are planning to come to the UK for a period
of time. Although most of the account opening process for this
product is available on-line, and therefore locally, we do require
the appropriate account opening documentation (ID and address
verification) to be presented to one of our offices in the UK
before we open the account.
Additionally we have products that cater for
non UK residents requiring an account in the UK via our international
banking centres. To qualify for this service the customer would
have to be our customer in their country of residence (this service
is available to non-customers for a fee but is not promoted)
Bank 4"We will currently open an
account for an individual if they can provide a UK address. The
only account we currently offer specifically to a non UK resident,
is an International Student product. We would however open accounts
for individuals who have recently moved to the UK from overseas
(such as economic migrants) and our staff have specific identification
procedures to support this process."
Bank 5"In principle we have no objection
to a non-UK resident opening an account. However, fraud is a major
concern for us and indeed many of our competitors and this does
have a bearing on product availability in practice.
We complete a risk assessment, which incorporates
fraud checks and UN/EU Sanction checks on all new accounts. The
fraud checks are undertaken via credit reference agencies and
as part of this process we require that the customer's address
is verified. This verification is possible for UK Residents as
the Credit Reference Agencies have access to data which enables
this check to be completed. This is not currently possible for
Non-UK Residents, due to data sharing issues.
For those individuals that are temporarily resident
in the UK, we have developed a specific product aimed at Polish
speaking migrants. This account can be opened on the production
of a passport or national ID card. We have a similar product for
the Indian market.
We also provide banking facilities to International
Students which are temporarily studying in the UK.
Bank 6"Yes. We have a business unit
that caters for international clients who wish to open accounts
with our UK entities. These international clients include foreign
nationals residing outside the UK who may wish to hold funds in
the UK, or UK expatriates living and working overseas who may
also wish to hold an account with the UK entity to facilitate
transactions they may have in the UK.
Our fraud controls and ID&V requirements
do not prohibit the opening of an account for a non-resident at
any UK branch. However, for operational reasons we would normally
direct an overseas resident to open an account with our nominated
branch in London which specialises in operating such accounts.
We also run initiatives where accounts are opened
in the UK pending arrival of an economic migrant from their home
country. Accounts are also opened for example for international
students, ie non-residents visiting UK for short term educational
Question 2: If no to 1, would it make a difference
if the person already had an account with you, had moved overseas
and wanted to open another account?
Bank 1"If a customer has an account
with us and moves abroad we would open a secondary account as
we have already undertaken identification and verification requirements"
Bank 2"Non-residents have the ability
to open up accounts referred to in Question 1 above."
Bank 3"Opening of a secondary account
for an existing customer is easier depending on the account opening
request and providing we hold current ID and VA information"
Bank 4"No, we currently only open
new accounts for people with a UK address"
Bank 5"Each request is considered
on a case by case basis and the decision made will be determined
by the perceived risk. If an existing customer (living abroad)
wished to open an additional account, our staff would still need
to undertake the same due diligence procedures, however the existing
relationship and associated knowledge of the customer and their
account profile would all have a bearing on the ultimate decision
and in the majority of cases an additional account will be opened."
Question 3: If no to 1, why not?
Bank 1"Inability to verify identity
and address details and inability to confirm the customer details".
Bank 2"For products other than those
mentioned, not being able to verify the address/identification
of a non-resident nor ability to check a credit database for fraud
Bank 4"This is a complex issue,
which we know has been discussed within the BBA membership.
Our credit decisioning is fully integrated with
the Credit Reference Agencies and this would not be suitable for
non UK residents. The same level of service is not available from
overseas Credit Reference Agencies.
With respect to the Basic Bank Account, this
too is currently offered only to UK Residents. We believe that
this is in line with the legislation and guidance in the UK for
this product ie the requirement to offer basic banking facilities
to socially excluded individuals resident in the UK."
Bank 5"We generally require a customer's
address to be verified before an account is opened for Fraud Management
Reasons. This policy also applies to Basic Bank Accounts, which
whilst not having an overdraft facility, are still the subject
of first and third party fraud, the main concerns being; uncleared
fraud, debit card excesses, mail interception and ID Theft.
Question 4: If someone moves abroad, do you require
them to close their account?
Bank 1"Nowe do not insist
on the customer closing their account if they move abroad"
Bank 2"No, there is no requirement
for the customer to close their UK account, however we do advise
the customer that they may have difficulties in operating their
account in the normal manner if our firm does not have a presence
in that particular jurisdiction. Where UK expatriates are taking
out a mortgage, or other product, with our Spanish, Irish or Dutch
subsidiaries, they can continue operating their UK accounts.
Bank 4"No. We only require accounts
to be closed if a customer moves to a jurisdiction which is prohibited
under our AML policy."
Bank 5"We do not normally require
customers to close their account if they move abroad. The exception
to this rule is where bespoke arrangements have been put in place
for corporate farming clients to open accounts for seasonal migrant
workers (ie crop pickers) and these are closed (with the clients
agreement) when they return home at the end of the season."
Bank 6"No (subject to normal regulatory
constraints such as compliance with international sanctions policy
etc.). For example, accounts remain open for expatriates, returning
overseas students, economic migrants. There is nothing to stop
these or any other account-holder maintaining their account when
no longer residing in UK (in some cases this may involve the account
being transferred to our nominated specialist branch)."
Question 5: If yes to 4, why?
Bank 4"We have a Country Control
Policy for AML purposes, which outlines certain high risk and
prohibited jurisdictions. The only jurisdiction currently classed
as Prohibited is Iran."
Bank 5"Not for the majority of our
customers (please see answer to Question 4)."
189 Not printed. Available on the FSA's website at