Written evidence submitted by the Chartered
Institute of Bankers in Scotland
On behalf of the Chartered Institute of Bankers
in Scotland, I am delighted to respond to the Committee's Call
for Evidence on the Government's proposals to change the system
of UK financial regulation, as set out in the July 2010 consultation
paper. I hope you will find our comments helpful.
1. GENERAL COMMENTS
Will the Government's financial regulation proposals
improve the framework for financial stability in the UK? Will
they work in a crisis?
Do the Government's proposals get the balance
right between tackling the problems of the last crisis and preparing
the UK financial system for the next one?
1.1 In our view, the proposals are helpful
in improving the regulatory architecture. They should help improve
both "early warning" of potential problems and more
effective crisis resolution through better communication between
the regulatory bodies. We believe these are necessary but not
sufficient steps, however, in preventing future financial crises,
as the regulatory changes alone will do little to improve the
public confidence and trust in banks and bankers on which a sustainable
banking industry must be built.
1.2 Rebuilding confidence and trust in banks
requires, in our view, rebuilding confidence and trust in the
integrity and competence of individual bankers, from Customer
Service Officers to Chief Executive Officers. We need to bear
in mind that not all the problems affecting the UK banking industry
were imported from the USpoor lending decisions, poor risk
management and poor liquidity management lay at the heart of the
difficulties faced by institutions including Bradford & Bingley,
HBOS and Northern Rock. "Better bankers" play as important
a role in ensuring financial stability as an improved regulatory
1.3 We would like to see, therefore, the
new regulatory framework supported by further work to develop
and embed a culture of professional integrity, founded on a common
commitment across the industry to high ethical, professional and
technical standards. This will require encouragement and support
from government and regulators in the form of:
working with the banking industry and
stakeholders to develop and agree set(s) of professional standards
and monitor compliance with thesethis could be supported
by a Professional Standards Board or similar, along the lines
of that suggested by the Future of Banking Commission;
introducing and monitoring requirements
for some form of initial and ongoing ethical and professional
training for those employed in the banking industry;
introducing a requirement for senior
staff and supervisors to positively encourage the development
of higher ethical, professional and technical standards within
their firm; and
working with professional bodies and
others to raise professional standards across the industry.
1.5 We are unsure that the totality of risk
in the financial system is being fully measured or understood
by regulators and institutions. Identifying potential, systemic
risks and taking timely action to avoid these is, in our view,
the key to ensuring the success of the proposed framework. This
will require financial institutions and regulatory bodies to recruit
and train greater numbers of more highly qualified banking and
risk professionals than now.
Should the FPC have a statutory remit? If so,
what should that remit be?
2.1 The main structural weakness in financial
regulation was the division of responsibilities between the Bank
of England and the FSA, and we believe the creation of the FPC
would address this defect.
2.2 The FPC should have ensuring financial
stability as its sole objective. Whilst factors such as the effects
of the FPC's actions on business and consumer lending, UK competitiveness
and bank profitability are important, we believe these are secondary,
political concerns that should not deflect the FPC from a clear
remit to ensure stability.
2.3 We are concerned, however, as to whether
the proposed Financial Policy Committee (FPC)or any such
bodywill, in practice, be able to "identify imbalances,
risks and vulnerabilities | and take decisive action" (ie
be able to predict the next crisis); the majority of economists
and regulators seemed unable to predict this one.
2.4 We propose that financial institutions'
Chief Risk Officers are included in the new regulatory framework,
perhaps as an Advisory Panel to the proposed Prudential Regulation
Authority (PRA), to ensure the early capture of potential systemic
risks. This could help the PRA and FPC better predict, prepare
for and prevent future crises.
3. THE PRUDENTIAL
Should the PRA be the lead authority over the
Consumer Protection and Markets Authority (CPMA)?
Is it appropriate for the PRA (and CPMA) to
adopt a judgments-based approach to financial regulation and supervision?
3.1 We believe it is appropriate for the
PRA to be the lead authority over the CPMA. Furthermore, we believe
that the conduct of business by firms and individuals should be
the responsibility of the PRA rather than the proposed CPMA, or
that there should at least be some form of joint responsibility.
"Unsafe" business practices such as lending without
proper controls are not simply consumer protection issues but
rather issues thatas we have seencan threaten the
stability of institutions and the system as a whole.
3.2 We strongly support the adoption of
a judgments-based approach to regulation and supervision and believe
this should prove effective provided:
institutions and regulators can recruit
and train the requisite numbers of qualified, experienced banking
and risk management professionals able to exercise professional
judgementthis will require major changes in the way financial
institutions and regulatory bodies recruit and develop their staff;
general principles of prudent banking
underpin the judgments-based approach, rather than prescriptive
formulae such as, for example, a maximum loan-to-value (LTV) ratiobad
lending decisions can as easily occur at 60% LTV or 90% LTV; and
regulators take steps to embed the culture
of professionalism required to support a judgments-based approach
to regulation, without which institutions may try to game the
system and push principles too far.
4. CONSUMER PROTECTION
Do the reforms provide adequate protection for
4.1 Ensuring adequate consumer protection
requires more than regulatory reform and the creation of new agencies.
Only the development of "better bankers" at all levels,
committed to high ethical, professional and technical standards
will embed the culture of integrity and trust that is needed to
demonstrate that the industry is truly "treating customers
4.2 The FSA's "Retail Distribution
Review" (RDR) offers a good example of how the financial
services industry can work with regulators to improve professional
standards and ensure better outcomes for consumers. The RDR applies
only to the relatively small, retail investment advice sector,
however. In our view, similar professional standards need to be
applied across the whole financial services industry.
4.3 There is strong public support for this
view. 88% of the public believe that all bankers should be required
to take professional banking exams to demonstrate their competence
and their commitment to professionalism.
Introducing new requirements for greater numbers of financial
services personnel to hold a relevant qualification and to demonstrate
an ongoing commitment to high ethical, professional and technical
standards through continued education would do more, in our view,
to improve outcomes for consumers than a change in the regulatory
4.4 We do not believe it would be helpful
or practicable to require all individuals employed in the financial
services industry to hold a specific financial services qualification,
however. Many individuals employed in the industry perform non-financial
services related roles and would not find such qualifications
4.5 Even if there is little appetite from
regulators to impose professional qualification requirements,
more could be done to encourage financial institutions themselves
to embed higher ethical, professional and technical standards.
This could include, for instance, a requirement for institutions
to report to the regulator the numbers of staff (particularly
those in Significant Influence and Approved Persons functions)
holding recognized qualifications.
5. OTHER ISSUES
Should any of the proposed bodies be given responsibility
for promoting competition in the banking and financial services
Should any of the proposed bodies have a role
in promoting the City of London?
5.1 We believe it might be helpful for all
the proposed bodies to be given a general (secondary) objective
to promote competition in financial services, but that financial
stability considerations must always override this where there
is any conflict. In particular, the CPMA could play an important
role in encouraging new entrants to the retail financial services
sector, and in fostering competition.
5.2 We do not believe that any of the proposed
bodies should have a role in promoting the City of London (as
national bodies they would in any case presumably promote UK financial
services, rather than the City alone). There are already a plethora
of government, industry and other bodies promoting UK financial
services and encouraging inward investment, and there is no need
for the regulators' integrity to be compromised by encouraging
them to act as a form of marketing agency for the UK financial
5.3 In a similar vein, the new Consumer
Financial Education Body (CFEB) already exists to promote public
understanding of financial services (many other bodies also undertake
work in this area) and there is no need for the CPMA also to work
in this area, as proposed.
5 Survey carried out online by YouGov plc among 2011
GB residents aged 18+. Data is weighted to be representative of
UK population. Fieldwork carried out 6-9 November 2009. Back