Written evidence submitted by Royal Bank
of Scotland Group plc
This document responds to the Treasury
Committee's Call for Evidence into the Government's plans for
changing the UK financial sector. It draws on RBS' initial views
on HM Treasury's consultation on these plans, which it is currently
analysing. Therefore this response is a summary of our position.
RBS fully supports the need for change,
both in the banking sector and its regulation. Given its part
in the crisis, RBS is both affected and constructively engaged.
Alongside other major UK banks, RBS has made significant efforts
to increase capital and liquidity buffers, and reduce leverage:
combined with the changes recently agreed by the Basel Committee,
the banking system will have a significantly reduced probability
of default. Much work is now also underway to enable banks to
fail without a seizing up of the financial system or creating
domino effects. Taken together, these measures provide better
responses in our view to the challenge of systemic risk, than
the calls for scale or scope restrictions.
Supporting the above are moves to strengthen
regulatory frameworks and quality of supervision. Regardless of
the debate about regulatory models, it seems clear that the tripartite
arrangements were stressed by the events of 2007-08, as was acknowledged
in part by the changes introduced under the Financial Services
Act 2010. We also share the view that a strong focus on system-wide
as well as individual entity risks is essential.
Consequently, this note therefore starts
from a position that is broadly supportive of efforts to strengthen
the UK's regulatory framework. It seeks to help achieve both a
finalised framework that works well and one thatin addressing
weaknesses in the tripartite frameworkdoes not overlook
potential challenges that the new design may otherwise pose. The
following comments therefore focus on areas which would benefit
from further careful consideration.
1. RBS fully supports the objective of ensuring
a greater focus on systemic or aggregate risks across the financial
system. Financial and wider economic stability, however, is not
solely dependent on the financial sector: consideration also needs
to be given to the impact of other policies, notably monetary
and fiscal policies. To be fully effective, a fully consistent
and coordinated approach across all policy areas should be pursued.
The mechanisms for achieving this in the new framework are limited
to cross-membership between the FPC and MPC; they would benefit
from further development.
2. As noted in the consultation paper, the
macro-prudential tools to be deployed by the FPC could have far-reaching
consequences for the financial sector and the economy more widely.
In framing an objective for the FPC it is important that it takes
into account the need to strike an appropriate balance, between
effective regulation and economic growth.
3. Given the significant impact that the
FPC would have on the financial sector and the wider economy,
accountability mechanisms need to be strong. We support the measures
proposed in the consultation paper in this respect, but feel they
could be further strengthened. The accountability of the Bank
of England more generally also needs to be examined, given that
the Bank will have significantly stronger and wider-ranging powers:
the need for additional checks and balances in the system should
4. We believe that the PRA should have regards
to the objectives of the FPC and the CPMA, and that these should
be strong considerations so as to maximise alignment of objectives
across the framework. The proposal to dispense with some or all
of the principles for good regulation, and with competitiveness
and innovation, is of concern and would benefit from further consideration.
There are many examples where rulemaking has benefited from the
disciplines of consultation and cost benefit analysis; such processes
provide opportunities not just for industry but for other key
stakeholders as well (such as consumer groups) to make their views
5. Given the open nature of the UK economy,
and the challenges faced by developed economies generally in adjusting
to a world where terms of trade have shifted significantly in
favour of many fast-growing emerging economies, we believe that
regard should be paid to competitiveness. In our view competitiveness
does not necessarily translate into weak standardsand such
a concern can be addressed by better defining a competitiveness
6. Given the intention to move to a more
judgement based, interventionist prudential regime, which questions
firms' strategies and business models, and not just their risk
management and controls, it is important that the PRA operates
under strong accountability mechanisms and is as transparent as
possible. We believe that any conflicts of interest of members
should be managed on a case by case basis through individual members
excusing themselves from particular discussions, rather than by
"switching off" their collective input.
7. A large part of the success or failure
of the new framework will hinge on getting the practical aspects
right and ensuring effective coordination between authorities.
Significant attention and focus should be paid to this issue.
Part of the solution in this respect may well include having (in
particular for firms regulated by both PRA and CPMA) a single
authority responsible for authorisation, permission and for approvals
of firms and individuals. The notion of a "lead supervisor"
should also be explored.
8. We support an effective regulatory and
supervisory regime for retail conduct of business issues. We believe
the regulator should work in favour of fair and reasonable outcomes
for consumers, in which financial institutions are held to account
in providing clear and understandable information, and consumers
take responsibility for their decisions.
9. As with the FPC and PRA, we are concerned
with the proposition that no account should be taken of the need
for competitiveness or innovation. Innovation is the lifeblood
of any business, and has provided many benefits to retail consumersranging
from new payment mechanisms and the development of remote banking
and associated services, to more varied mortgage products (such
as fixed or capped rate pricing and offset mortgages), that can
better fit customers' different needs.
10. Whilst we broadly agree with the comment
in the HMT consultation that prudential and conduct of business
regulation require different approaches and cultures, we would
question the notion that the consequent tensions that this can
create no longer exist in a system with separate regulators. As
noted in relation to the PRA, it is not yet clear how the significant
risks of supervision overlaps and gaps between the CPMA and PRA
will be effectively dealt with.
11. One area where significant rationalisation
could be achieved, as noted in the consultation, is with respect
to the regulation of consumer credit: we would strongly support
the mooted transfer of responsibility for consumer credit from
the OFT to the new CPMA.
12. The proposal to separate out primary
and secondary market regulation of equities and debt markets will
pose risks and challenges. The UKLA's primary function is more
akin to market regulation, in ensuring a consistency of disclosure
and process for listed securities, and it is important in our
view that the UKLA should stay close to those markets on which
the securities are admitted to trading. In addition, listing authorisation
for many specialist products such as covered bonds and securitisations
would not sensibly sit outside a markets regulator. In putting
both retail and wholesale conduct regulation into the CPMA, it
will be essential that the new regulator maintains an appropriate
distinction between retail and wholesale markets regulation.
13. Whilst we accept the logic of splitting
responsibilities, by transferring systemic market infrastructure
supervision to the Bank of England, we would stress the importance
of ensuring close coordination between the CPMA and the Bank of
England in relation to regulating market infrastructures and individual
firms subject to regulation by both the Bank and the CPMA. The
CPMA is intended to regulate "all financial instruments".
However, currently the Bank of England regulates wholesale markets
in non-investment products. These markets work effectively and
there has been no regulatory failure. Whilst accepting the proposed
changes in institutional arrangements, we would not want to see
any change in the substantive regulation of these non-investment
14. Whilst a greater focus on financial
stability and system-wide risk should help mitigate future crises,
the consultation does not make clear who will ultimately take
the lead during a crisis. We believe that more thought should
be given to this. Although the tripartite committee was in the
event found lacking, it at least provided a formal forum for bringing
together key parties involved in managing a crisis. The new framework
does not address the need for a crisis management body.
15. We are also concerned that the tools
outlined in the consultation appear to concentrate on dealing
with individual failures and are short on tools to respond to
market stress events. As the consultation paper makes clear, no
two crises are the same and it is possible the next crisis could
arise as a result of some other factor than the failure of an
individual financial institution. We would therefore encourage
the development of tools which can support the market overall
as well as tools for dealing with "ailing" institutions.
16. By way of a concluding, general, but
in our view important observation, the consultation paper says
relatively little about regulatory developments in the EU and
how the new framework would interact with the new authorities
now being created. Given the importance of EU regulation at the
national level, it is absolutely critical in our view that the
UK authorities prepare for these new structures and that the PRA
and CPMA are geared up to taking an influential lead in these
22 September 2010
28 The UK's six largest banks (Barclays, Lloyds, HSBC,
RBS, Santander and Standard Chartered) have seen an average 57%
increase in their Tier 1 capital ratio, from 7.6 percentage points
in June 2005 to 11.9 percentage points in December 2009-the highest
level for over 50 years. Leverage has fallen from 35 times, at
its peak at the end of 2008, to 21 times as at December 2009.
Data is from publicly available information. Back