Banking Crisis - Treasury Contents

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;

    —  our severance policy;

    —  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 Of those 616, four significant influence functions were refused, with a further 75 being withdrawn (representing 13% of the significant influence function applications receiving closer scrutiny).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:

    —  salary;

    —  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 proposal.


  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.[189]


  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 be granted.

    —  When there has been service of more than six months and less than two years. A sum equivalent to 13 weeks' salary.

    —  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 scheme—KF Concept (KFC).


  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 Shift—the 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 exercise.

    (b)  Scenarios—these 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 other—in 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 pandemic—to 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 scenarios—the 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 longer—more a "U"-shaped recovery. Finally we considered the impact of stagflation—in 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 simulations—these 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 this information.


  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

Appendix A

  FSA Job Families can be found on the FSA's website at

Appendix B


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 of £5000.

  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 be completed.

  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 purposes."

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."

  Bank 6—N/A

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 information".

Bank 3—N/A

  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.

  Bank 6—N/A

Question 4: If someone moves abroad, do you require them to close their account?

  Bank 1—"No—we 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 3—"No"

  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 1—N/A

  Bank 2—N/A

  Bank 3—N/A

  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)."

  Bank 6—N/A

Not printed. Available on the FSA's website at Back

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