Financial Regulation: a preliminary consideration of the Government's proposals - Treasury Contents

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:[28] 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 that—in addressing weaknesses in the tripartite framework—does 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 be examined.


  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 known.

  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 standards—and such a concern can be addressed by better defining a competitiveness objective.

  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 consumers—ranging 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 product markets.


  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 bodies.

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

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