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

Written evidence submitted by the City of London Corporation


  1.  The City Corporation welcomes the opportunity to contribute to the Committee's inquiry into financial regulation. The City of London Corporation aims to promote and reinforce the competitiveness of the UK-based financial services sector by tackling issues which may impact upon the open, efficient and competitive environment for doing business. The City is keen to ensure that the most effective possible regulatory structure for UK-based financial services is put in place, in order to safeguard the stability of the financial system, to help restore public confidence and to safeguard the competitiveness of the sector, regardless of the nationality of ownership of the companies concerned. A healthy and thriving financial services sector provides employment, generates export earnings and produces tax revenue in order both to address the deficit and to finance public service provision.

  2.  The Corporation's work on financial regulation matters is informed by its International Regulatory Strategy Group (comprising representatives from a variety of industry sectors including investment banking, asset management, insurance, legal and accountancy services, exchanges and market infrastructure), which replaced an earlier EU Advisory Group. Its role includes identifying strategic level issues where a cross sectoral position can add value to the existing industry views.

  3.  In the current economic climate it is clear that constructive collaboration is required between authorities and industry, but the City Corporation also believes that industry must be proactive in seeking to improve the situation before solutions are imposed. Confidence in the financial services sector's ability to generate growth has been dented and the business community is aware that maintaining the status quo in terms of banking supervision is not a realistic option. Some adjustment to the regulatory framework is therefore inevitable.

  4.  This memorandum addresses the specific questions posed in the request for evidence to which the City is in a position to respond. It acknowledges that there are widely differing views across business sectors and between companies and trade bodies. It does not seek to offer a consensus.


  5.  A particular concern in the new regulatory structure is that firms may be faced with being supervised by two separate regulators since it appears there will be much overlapping in both the authorisation of firms and individuals between the proposed Prudential Regulation Authority (PRA) and the Consumer Protection and Markets Authority (CPMA). It is essential therefore that expensive and long drawn out duplication of work between these regulatory authorities is avoided, with an integrated model used as far as possible. There is also a risk in the new structure of separate and distinct rulebooks evolving between the PRA and the CPMA, particularly in the area of prudential regulation, where the two regulators share responsibilities. A single and consistent rulebook is essential for all participants in the sector.

  6.  Authorisation should be dealt with by one authority, in order to ensure efficiency and consistency in regulatory decisions. Giving the CPMA responsibility for collecting fees from the firms reinforces the argument in favour of also giving it sole responsibility for authorisation of individuals and organisations, in order to avoid duplication and to create a direct link between the handling of applications and the granting of authorisation.

  7.  In addition, the new structure does create the possibility of duplication, not taken into account in the impact assessment attached to the consultation paper. This includes the proposals to separate out the FSA's existing authorisation, enforcement, and rule-making functions between both the PRA and the CPMA. There is a clear need to examine more closely the level of benefit gained against costs incurred. If the supervisory duplication within the new structures materialises, there is a risk that the costs of these proposals may exceed those set out in the assessment. The estimate in the impact assessment of transitional costs of £50 million spread over three years seems low in view of the scale of the reorganisation required.

  8.  Although it is appropriate to give the CPMA primary responsibility for the operational supervision of markets, there are concerns over the transfer of the listing authority responsibilities to the Financial Reporting Council, particularly since this would take place prior to any final decision being taken about a companies regulator. The UK Listing Authority has very different functions from the FRC and it is not clear how a merger of the two would deliver public benefit. It is important for the FRC to retain its independent status in order properly to carry out its role as the ultimate regulator of the accountancy profession through its operating bodies (the Accounting Standards Board, the Auditing Practices Board, the Board for Actuarial Standards, the Professional Oversight Board, the Financial Reporting Review Panel and the Accounting and Actuarial Discipline Board). It is not currently clear how these functions, for which independence is essential, could be brought together with those of a listing authority.

  9.  The Government consultation implies that the main dangers that the changes in regulatory structure are designed to address are bank or building society failures on the pattern of the events of 2007-08. There can, however, be occasional failures in the non-banking area of the financial services sector. Effective powers of intervention should be in place to resolve such crises, although in the event of the failure of a non-banking institution, the appropriate point of intervention will need to be identified at the time, rather than identifying a mandatory defined threshold.


  10.  The Financial Policy Committee (FPC) should be given the primary objective of setting capital ratios in a manner that would underpin financial stability, enabling it to use this instrument in a counter-cyclical manner. The FPC should also be able to apply secondary factors, since the use of capital ratios will not alone be sufficient to support financial stability. This could include the setting of liquidity ratios and leverage ratios appropriate to ensure financial stability.

  11.  These factors should be set as statutory objectives, but with the FPC having the discretion to determine the level at which capital, liquidity and leverage ratios should be set, keeping within the framework of Basel III. There will be a need for international co-ordination in determining the level at which all these new instruments are set in order to ensure that as far as possible that policy contradiction in different markets are avoided.

  12.  Both the PRA and CPMA should have regards to the primary objectives of the FPC, since it is the primary body charged with setting the parameters to achieve financial stability across the system.


  13.  The proposed changes in the UK's regulatory structure will of course take place as a new system of EU-wide supervisory institutions is put into place, with the banking supervisor based in London. It is essential that the new UK bodies, from the start, seek to influence the development of the EU-wide regulatory and supervisory structure, encourage secondments and develop a dialogue with equivalent bodies including those in the United States and the emerging financial centres of the Middle East and Asia.

  14.  The requirement for the CPMA (and other regulatory bodies) to have regard to the competitiveness of the UK financial service sector is strongly endorsed. Whilst proper and effective regulation is essential for financial stability and both domestic and international trust and confidence, it is important that the competitive position of the sector, as major contributor to employment, export earning and tax revenue, is not undermined by regulatory requirements and approaches which exceed in their severity those of partners and competitors.


  15.  The City Corporation also notes the Government's announcement that it will seek to improve the nationwide arrangements for combating specialist crime. In 2007 with the support of the City Corporation, the City of London Police assumed National Lead Force (NLF) responsibilities for Fraud and Economic Crime. The City Corporation makes a substantial contribution to the operational costs of the City Police, not only in its role as NLF, but in support of its broader role as the territorial force for the "Square Mile". Benefits are clearly gained from this interdependency and the City would not wish to see progress made in this key area of policing compromised in establishing the new National Crime Agency (NCA) or Economic Crime Agency (ECA).

  16.  The City of London Police is very keen to share its expertise in this evolving landscape. Close collaboration can bring benefits to all parties involved, ensuring that these have ready access to the resources and technology employed, as well as the systems, processes and agreements which already in place in developing initiatives such as the National Fraud Investigation Bureau (NFIB) and Action Fraud. In addition, the City Corporation would continue to provide a strong and established system of accountability with local residents and businesses through the Police Committee.

  17.  There is a strong desire, certainly among the business community, that fraud remains a top priority. The City Police has built the trust of the financial services industry and this is fundamental in ensuring that intelligence continues to be shared to prevent crime and to disrupt serious and organised crime groups.

October 2010

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