Financial Services Bill

Memorandum submitted by th e British Bankers’ Association (FS 08)


The British Bankers’ Association (BBA) is supportive of the programme of initiatives to reform the UK banking system and views the reform of the UK system of financial services regulation as a key part of this. We have contributed to the three consultations, to the pre-legislative scrutiny process and to relevant inquiries by the Treasury Committee and see the introduction of the Bill into Parliament and the Government’s response to the pre-legislative and select committee reports as an important step in putting in place a regulatory regime suited to the strategic oversight of the financial system and capable of delivering judgement-led regulation.

In keeping with the Joint Committee on the draft Financial Services Bill, we consider that successful regulation depends more on regulatory culture, focus and philosophy than structure. An aspect of the cultural change needed is the shift towards forward looking supervision and as the Joint Committee observed this requires staff with the right experience, approach and attitudes. While a change in culture is not something that legislation can guarantee, it is also clear that the setting of the right statutory objectives, the allocation and alignment of powers and responsibility to those objectives, and the establishment of appropriate systems of governance, accountability and engagement is fundamental to the refocus sought. Judgement must also be grounded in good quality data and empirical evidence.

Our Second Reading brief is publicly available and can be accessed here. This note provides a more detailed commentary based on our assessment of issues at the time of the House of Commons’ Committee discussion. In this brief we:

× Ask whether the statutory objective of the Financial Policy Committee (FPC) is appropriately defined and includes the right ‘have regard’ to the government’s broader objectives for economic growth;

× Underline the importance of the FPC’s activity dovetailing into European and international arrangements and also the importance of the consultative engagement to be set out in the note being prepared by the Bank of England (Bank) and Financial Service Authority (FSA) and the need for this to span the FPC.

× Express support for the new Oversight Committee providing Parliament can satisfy itself that this augments, and sufficiently strengthens, the Bank’s accountability to Parliament.

× Question the circumstances in which it would be appropriate for a Governor of the Bank, after serving an eight year term, to become a Deputy Governor.

× Support for the introduction of a focused conduct of business regulator, including the transfer of consumer credit regulation to the F inancial C onduct A uthority (FCA) , noting the diversity of the types of firm and market activity which it will oversee and the geographical limitation of its authority under home/host arrangements.

× Support for the introduction of judgement led supervision, but express concern over the lack of statutory responsibility for international competitiveness, innovation and growth.

× Question whether the commitment to principles of good governance on the part of the new regulatory authorities should be strengthened.

× Welcome the commitment to a single, independent, compensation scheme, support the budgetary oversight by the National Audit Office (NAO) , expressing a preference for this oversight to be drawn into a single, coordinated exercise across all of the financial regulation authorities.

× Are supportive in principle of super-complaint powers, but also see these as provisions which will benefit from close attention during the Parliamentary process, as would the obligation to publish determinations under S chedule II , given a firm s inability to appeal.

× Explain that we do not see the need for a fiduciary duty as proposed in amendments tabled given the general principles of the Bill and the provisions of the Markets in Financial Instruments Directive (MiFID).

× Support the duty on the Governor to notify the Treasury in the event of a potential financial crisis , but see a case for broadening the public finance test while at the same time leaving the decision on which special resolution tool to utilise to the Governor.

× Support the preparation of a Memorandum of Understanding ( MoU ) on the coordination of functions relevant to UK membership and representation in international organisations.

× Support the introduction of provisions for conducting inquiries and investigations and also the investigation of complaints against regulators.

The BBA is the leading trade association for the UK banking and financial services sector. We represent over 200 banking members, which are headquartered in 50 countries and have operations in 180 countries worldwide. These member banks collectively provide the full range of banking and financial services and make up the world’s largest international banking centre. As outlined above, we have engaged fully on the development of the Bill; we are also contributing to the work being undertaken in respect of the Government’s initiative in response to the Independent Commission on Banking and the many other regulatory reforms being progressed on an international, European and domestic basis.

PART 1: Bank of England ( and the Financial Policy Committee )

The Financial Services Bill brings together responsibility for all aspects of financial stability within the Bank of England group since:

- the new FPC will be responsible for macro-prudential oversight of the financial services system as a whole;

- the Prudential Regulation Authority (PRA) will be responsible for ensuring the safety and soundness of individual firms; and

- the Bank itself will be responsible for the regulation of systemic infrastructure.

This brings responsibility for financial stability under one roof and subject to specific concerns we are supportive of the broad direction of change.

Clause 3: Financial stability strategy and the Financial Policy Committee

Objectives, modus operandi and tools

The establishment of the FPC is a major new addition to the UK regulatory makeup and this makes it all the more important that we lay the right ground rules for its operation. This includes the setting of the right statutory objective, remit and powers and also the shaping of the right governance, accountability and due process mechanisms. The Bill introduced has been amended to clarify the types of risk upon which the FPC should focus, with reference to the interconnected nature of the financial sector and the immateriality of whether the risks involved arise in the UK or elsewhere. It is important to stress that the FPC will be most effective if it acts within the context of the new UK and EU supervisory architecture and does not simply replicate the microprudential supervision of individual firms.

We were pleased to see the Chancellor say to the Joint Committee that we should not be seeking "the stability of the graveyard" and for this to be reiterated during the Second Reading debate where he confirmed that the job of the FPC will be to act "not just to moderate a credit boom but to try and alleviate a credit bust". We agree with this but remain unsure whether this strategic positioning for the FPC is reflected in the statutory objectives for the FPC , or for the Bank’s overarching financial stability objective, as set out in the draft Bill.

In p articular , we see a case for Parliament reappraising whether the FPC’s responsibility for engendering financial stability has been properly set into the context of the Government’s wider objectives for economic growth. We would therefore say that in the same way as the 1998 Act sets the objective for monetary policy as maintaining price stability and, subject to this, to support the economic policy of the Government, including its objectives for growth and employment, we believe that the legislation underpinning the FPC be drafted in the same way, specify ing that the Bank’s ‘financial (stability) policy’ objectives as being:

a) to maintain a stable and sustainable supply of credit to the economy and

b) subject to that, to support the economic policy of Her Majesty’s Government, including its objectives for growth and employment.

The proposed objectives for the FPC as set out in Clause 9C(1) of the draft Bill – for the FPC to exercise its functions with a view to contributing to the achievement by the Bank of the Financial Stability Objective as further defined by 9C(2) and (3) – could then be set as ‘specifications of matters relevant to objectives’.

There are two aspects to these proposed changes: first, the focus on a ‘sustainable supply of credit’ would provide a more easily defined objective for the Bank and FPC to work to, and be held account for to Government and Parliament. Secondly, and most importantly, by using the same wording as the monetary policy objective, the FPC’s actions would be appropriately set in the wider economic context with due regard for growth, just as when the MPC makes interest rate decisions.

We would view this as a much more positive setting for the work of the Financial Stability Committee – the primary objective of which is clear – and preferable to the caveat provided by 9C(4) which adds that the FPC is not required or authorised "to exercise its functions in a way that would in its opinion be likely to have a significant adverse effect on the capacity of the financial sector to contribute to the growth of the UK economy in the medium to long term".

We observe that much of the discussion of the role and purpose of the FPC has focused quite narrowly on strengthening the resilience of the banking sector to withstand financial shocks as opposed to the financial system as a whole – including the shadow banking sector – or attempting to influence more actively the amplitude of the economic cycle. Whilst we recognise the early stage in thinking on these issues, we warn that macroprudential policy should not simply duplicate microprudential supervision of the already heavily regulated banking sector or be used to impose undifferentiated capital surcharges on regulated financial institutions in an effort to mitigate all possible risks to financial stability. Capital buffers of this type are a blunt tool with a questionable track record of effectiveness and the potential to create unintended consequences. To be successful, macroprudential supervision must be broader and consider the wider financial system and drivers of financial instability. In this context, the FPC must consider the tools it will use to mitigate risks in the unregulated shadow banking sector, where risk might migrate with the increase in regulation of the banking sector. This type of analysis should be part of a comprehensive cost-benefit analysis which should be undertaken before either the power of recommendation or direction is used.

We should add that we have responded comprehensively to Bank of England discussion paper on the instruments of macroprudential policy. Our consultation response can be accessed here. In this we explain that while the FPC’s directional powers will be an important element of the framework, we would not wish them to overshadow the power to make recommendations, nor the other important drivers of financial stability such as fiscal and monetary policy. In many ways we see the monitoring of financial stability and the provision of early warnings about emerging risks – via FPC minutes and the Financial Stability Review – as the principal responsibilities of the FPC.

This point is reinforced by the fact that the extent to which the proposed directional tools will bind and influence the market remains unclear. Not least due to leakage: the risk that a measure taken by the FPC will be reduced in its effectiveness by , for example :

· lending via foreign branches which will not typically be subject to FPC decisions;

· direct cross-border activity from banks not subject to UK prudential requirements;

· activity by non-bank financial companies and broader financing in capital markets; and

· intra-group corporate lending.

Given that the drivers of financial instability can operate on a global level, it is vital that the issue of leakage is fully considered and mitigated, where possible, by the UK acting in coordination with international partners. Doing otherwise runs the risk that the use of macroprudential tools may evolve into an exercise in distorting UK markets to counteract distortions elsewhere in the world, with the risk of addressing symptoms rather than causes and that effectiveness will be diminished if the UK acts alone.

This discussion cannot be separated from the realities of European Union law and particularly the way in which key pieces of forthcoming legislation, such as the Capital Requirements Directive (CRD) and Regulation s (CRR) are implemented. The Bank’s stance on ‘maximum harmonisation’ is well known as is its view of the constraints this will impose on the FPC’s ability to flex instruments governed by Binding Technical Standards. We believe that it is in the interests of the UK to act in partnership with other Member States through the European Banking Authority and the European Systemic Risk Board to make the case for flexibility in specific areas of the rule book – as is envisaged by the CRR in relation to the risk-weightings attached to residential mortgage lending. This both provides macroprudential flexibility and ensures that concerns over leakage are minimised, at least within the EU. Whilst the paper states that ‘the rationale for maximum standards is not clear from a prudential perspective’ we would simply observe that there is a risk that if one Member State was to impose higher Pillar 1 standards on the banks it supervises then it is possible that this could cause those institutions to retrench their activities in other Member States with destabilising results. The current version of the CRD IV text envisages that the flexibility of Pillar 2 will be enhanced to enable greater macroprudential flexibility.

We also underline the importance of the FPC being subject to the usual due process requirements in respect of the broader instruments that it intends to utilise in fulfilling its role. This includes the dialogue which it has commenced on disclosures within the financial statements of the major UK banking groups. At the time of writing, we are still awaiting the Bank/PRA note on the PRA’s proposed consultation arrangements (source: HMT policy document ‘securing stability, protecting consumers’ paragraph 3.30). As the PRA will be charged with acting upon the FPC’s recommendations it is important that the note sets out how the consultative arrangements will work in this respect. A clear understanding of the consultative arrangements to be followed is needed to ensure that markets do not misinterpret statements made by the FPC and others.

Clause 4: Further amendments relating to the Bank of England

In the last 12 months a number of public consultations and parliamentary committees – such as the Treasury Select Committee and the Joint Committee – have examined the governance arrangements regarding the Bank of England and produced a number of recommendations. We are therefore disappointed to note that these recommendations have not been fully taken forward in the Bill.

The Government’s Response to the Joint Committee states that it will consider the Bank’s own proposals in this area "before deciding whether to bring forward further legislative changes". We have noted the response from the Court of the Bank and welcome the recognition that new responsibilities for the Bank in the area of financial stability will need to be accompanied by new accountability mechanisms. We therefore support the creation of an Oversight Committee for financial stability made up entirely of non-executive members of the Court. We further support the intention that the Oversight Committee be expected to commission retrospective reviews of policy-making and implementation performance and agree that the capacity for these should include both internal review and periodic or ad-hoc external review from expert authorities such as the International Monetary Fund (IMF). Parliament will wish to consider how these arrangements fit within the accountability of the Bank to Parliament through the Select Treasury Committee.

We agree that the independence of the Governor of the Bank is vital and for this reason support the move to a single eight-year term as recommended by the Treasury Committee.

We were surprised however to see the provision at paragraph 1(6) of Schedule 2 proposing that paragraph 6 be substituted with:

"6 (1) The fact that a person has held office as Governor of the Bank does not disqualify that person from appointment as Deputy Governor or director of the Bank."

It is not immediately obvious to us the reasons why a Governor should become a Deputy Governor after serving an eight year term as Governor or the circumstances in which this would be appropriate. It would be helpful therefore if this could be explored further in committee.

PART 2: Amendments of FSMA 2000

Clause 5: The new Regulators

Financial Conduct Authority

We support the establishment of a dedicated conduct of business regulator and also the proposed change to the FCA’s strategic objective in respect of the functioning of relevant markets and the change to the operational objective in respect of promoting effective competition in the interests of consumers, subject to there being clarity about the role of the FCA and the role of the competition authorities. But we also continue to believe that the FCA should have an operational objective aimed at promoting growth and innovation, given its benefits to both customers and the wider economy. We feel that relegating this objective to solely a competition consideration understates its broader significance. And in the context of competition, we feel that a clear delineation of the responsibilities of the competition authorities and the FCA in statute would remove any uncertainty in this area. This should be complemented by a clear standard for using competition powers, including a transparent appeals process led by an expert, independent body.

We support the transfer of consumer credit regulation to the FCA and the retention of substantive Consumer Credit Act 1974 (CCA) provisions. The Bill maintains the new powers proposed in respect of product intervention, the disclosure of warning notices and the use of misleading financial promotions, each of which raises important issues of principle and a need for appropriate safeguards in respect of the exercise of such strong powers .

We note the definition of consumer remains broad and the Joint Bill Committee’s support for not restricting this to a narrower category as the draft Bill requires the FCA to tailor its approach to different types of consumer. The FCA is required to have regard to the differing degre e s of risk involved in d if ferent kinds of investment or transaction ; and the differing degre e s of experience and expertise that consumers have. However the FSA’s rule book contains a variety of consumer definitions which could usefully be harmonised in the legislation.

The consumer protection objective requires that the FCA ha s regard to ‘the different degrees of experience and expertise that different consumers may have’ . We consider that this could be more explicitly drawn to distinguish different classes of customers, whether wealth y or potentially vulnerable. By extension, this might lead to different requirements and levels of protections, for instance, through the development of simple transparent products.

These and other issues will be explored further not only as part of the Parliamentary process but during the course of planned consultations. In taking thinking forward, it is essential that we have in the forefront of our mind s not only the breadth of the FCA’s scope, and the diversity of the types of firm and market activity which it will oversee, but also the geographical limitation of its authority under home/host arrangements .

Prudential Regulation Authority

The BBA supports the measures included in the Bill to bring about a more judgement-led approach to regulation and welcomes changes to the Bill intended to strengthen this, some of which were at the suggestion of the Joint Committee. The changes to the Bill are as fundamental as proposing that a duty to supervise be placed on the PRA, which we see as being very distinct in focus from assessing compliance. This is a prime example of the way in which statutory objectives and responsibilities can lay the groundwork for setting the right culture and strategic approach. We note the intention to consult on a draft Order seeking to clarify threshold conditions and effect a division between the PRA and FCA and would underline the importance of getting this right. We also note and support the intention to strengthen the supervisor’s powers to monitor emerging risks at the holding company level, subject to caveats about scope and relevant experience in the case of global institutions. We support the shift towards forward looking judgement-led supervision but would make the point that these judgements should be based on timely and accurate data – i.e. grounded in empirical evidence.

We remain disappointed however that the Government has not accepted the case for the PRA and FCA also being required to bear in mind international competitiveness, innovation and growth. We would like to see this reconsidered. We cannot see why the Government would not wish to send out a strong signal that "Britain is open for business" by committing to a competitive regulatory regime. The attractiveness of the UK as a place from which to conduct financial services cannot be taken for granted and there is increasing anecdotal evidence of new operations being established overseas in preference to in the UK. We therefore see a case for a renewed commitment to better regulation and the avoidance of gold plating. We also disagree with the assessment that innovation should not be a relevant factor for the PRA and FCA. We would see this as being entirely consistent with the objectives set for the three European Supervisory Authorities under recital 9aa of the Regulations applicable which require that in each case the authority should take due account of the impact of their activities on competition and innovation, global competitiveness, financial inclusion and the strategy for jobs and growth.

Engagement with practitioners and other interested parties, and the transparency with which this takes place, is an important feature of the UK regulatory landscape. We will therefore take particular interest in the Bank of England and FSA note requested by the Treasury and support the amendment to the Bill to require the PRA to report annually on its consultation activities as part of its annual report.

Further provisions relating to FCA and PRA: Duty to follow principles of good governance

We would question whether the proposition under Chapter 3C on amended FSMA 2000 that in managing their affairs each regulator ‘must have regard to such generally accepted principles of good corporate governance as it is reasonable to regard as applicable to it’ is as positive a statement as Parliament may reasonably have expected.

We further add that we regard transparency and accountability to Parliament as an important check and balance and concur specifically with the Treasury Select Committee’s recommendations in this regard including the expectation that the Chief Executive of the FCA be subject to pre-appointment scrutiny by the committee. We would also envisage the committee wishing to hold the Chief Executive of the FCA (and the PRA) to the same level of accountability as applies currently to the Chief Executive of the FSA.

Clause 35: The Financial Services Compensation Scheme


We welcome the Government's commitment to a single, independent, compensation scheme.


W e welcome the intention that the FSCS and FOS be placed under a statutory obligation to publish annual plan s and be audited by the N AO the Government’s proposals in relation to the FSCS which implement dual lines of accountability to both the PRA and FCA with supporting oversight from the NAO. Our preference however would be for this budgetary responsibility to be fully coordinated and drawn into a single budgetary exercise spanning all of the financial regulatory authorities.

The role of the FSCS ha s expanded in recent years to include financing the ex ante costs of resolution. In addition to this, t he recast Deposit Guarantee Schemes Directive is expected to introduce mandatory pre-funding requirements for the FSCS deposit sub-scheme. While we support the FSCS assum ing responsibility for overseeing and managing the Deposit Scheme pre-fund , we also see a case for review ing its governance arrangements in order to ensure that the FSCS Board has the experience and technical expertise needed to oversee the Scheme's new responsibilities.

New Clause 217A provides for FCA, PRA and the FSCS to co-operate with each other in relation to the FSCS. There should be an explicit obligation under these co-ordination arrangements for an ongoing review of the fitness for purpose of the Scheme's funding arrangements.

Clause 40: Provisions about consumer protection and competition

We note the Bill provides that consumer representatives should be able to make super-complaints to the FCA and also the Government’s intention that, in a narrow range of circumstances, firms and the FOS should be able to refer matters concerning mass detriment to the FCA and require a response in 90 days . This extends the scope of those potentially raising provisions far wider than under the existing provisions of the Enterprise Act (2002) . Whilst we are supportive in principle of super-complaint powers, these are also provisions which will benefit from close attention during the Parliamentary process (not least as they have been introduced without full prior consultation) , as would the obligation to publish determinations under Schedule II , given a firm s inability to appeal. In order to avoid conflicts of interest it may be sensible for the legislation to exclude organisations which provide, promote or intermediate advice on financial services themselves from becoming a ‘nominated party’.

We note that amendments to the Financial Services Bill have been put forward with a view to introducing a new fiduciary duty into English law (see, for example, amendments 49 and 64). Our assessment is that a statutory fiduciary duty to create a level playing field between firms’ and consumers’ responsibilities is neither necessary nor helpful to consumers since the Bill already contains a general principle that "those providing financial services should be expected to provide customers with a level of care that is appropriate having regard to the degree of risk involved…and the capabilities of the consumers in question", which is a principle that we support. MiFID, which applies to various activities related to investment business (e.g. advising on and dealing in investments), also includes duties similar to fiduciary duties as it requires firms to act in the best interests of clients, disclose third party inducements and manage out or disclose conflicts of interest.

PART 3: Mutual societies

No comment at this stage .

PART 4: Collaboration between Treasury and the Bank of England , FCA or PRA

Clause 54: Duty of the Bank to notify Treasury and Bank of England , FCA or PRA

We have previously expressed concern, in the context of crisis management, over the lack of clarity about the duty on the part of the Governor to notify the Chancellor of a potential financial crisis and view the arrangements set out in the Bill and the MoU as being more in keeping with the type of interaction that we believe is likely to take place. The provisions, however, merit further consideration since we are unclear that the assignment of powers now proposed is consistent with the strategic division of responsibilities envisaged by the Government, including the proposed power of direction over the Bank; we expand upon this below in respect of Clause 61.

Clause 60: Duty of the Treasury, Bank and PRA to co-ordinate discharge of functions

While we are fully appreciative of the distinct roles to be played by the PRA and FCA, it is equally clear that there is a clear need for effective coordination between the two if duplication and administrati ve burden and confusion in firms’ daily regulatory engagement are to be avoided . We are therefore pleased to see the mechanism for coordination being put in place and the accountability that will underpin these and will consider in particular the MoU provisions relating to the F SCS , the way in which the FCA and the FOS will work together and the relationship between the FCA and the Money Advice Service (MAS). An initial inspection suggests that concerns relating to the governance of these bodies may not have been fully met.

We concur with the view that there are detailed and complex considerations in respect of issues such as the disclosure of information and the legal liability in the case of failed banks and look forward to the analysis and consultation expected to take place during the passage of the Bill.

Clause 61: Memorandum of understanding: crisis management

We are supportive in principle of the notification arrangements set out in the MoU but have identified the following issues which require further detailed consideration:

· Whether the public funds test will in future be the right basis upon which to determine that the Chancellor should be notified of the threat to financial stability;

· Whether the responsibility on the part of the Bank to notify the Chancellor may have a behavioural effect on the PRA’s assessment of the threshold conditions for resolution; and

· Whether placing the decision on whether to utilise any bail-in capacity into the hands of the Chancellor (charged with the protection of public funds) and out of the Bank’s (charged with protecting financial stability) may contribute to the financial deterioration of the institution concerned.

Our full commentary on the MoU can be accessed here

Clause 62: Memorandum of understanding: international organisations

The BBA was one of the organisations that in recognition of the importance of UK engagement in global and European regulatory bodies recommended the establishment of an international regulatory secretariat. We are therefore pleased to see the amendment to the Bill to require that the international coordination MOU establish a committee under Treasury chairmanship and reporting to the Chancellor, with FCA, PRA and Bank membership, with the aim of agreeing consistent objectives and effective international engagement. As the Treasury policy document illustrates, this engagement takes very different forms across the different authorities spanning the PRA’s participation in supervisory colleges and the European Banking Authority engagement on the part of both the PRA and the FCA in international regulatory discussions.

So, for instance , we can see the logic of the division of responsibility between the Bank and FCA in respect of market infrastructure, but also see the importance of the Bank and FCA working closely on regulatory matters, including those where the Bank is the competent authority but the FCA holds the UK voting seat in the European Securities and Markets Authority (ESMA).

PART 5: Inquiries and investigations

We support the introduction of provisions on the conduct of inquiries and investigations.

PART 6: Investigation of complaints against regulators

We support the introduction of arrangements for the FCA, PRA and the Bank to put in place a scheme for the prompt, independent investigation of complaints made against them in respect of their relevant functions.

PART 7: Amendments of Banking Act 2009

PART 8: Miscellaneous

PART 9: General

No comment at this stage.

February 2012

Prepared 2nd March 2012