Written evidence submitted by the City
of London Corporation
INTRODUCTION
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.
ROLES AND
RESPONSIBILITIES OF
THE NEW
BODIES
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.
FINANCIAL POLICY
COMMITTEE
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.
OTHER ISSUES
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.
ECONOMIC CRIME
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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