Financial Services Bill

Memorandum submitted by HSBC Bank plc (FS 11)

With our headquarters in London , HSBC is one of the largest banking and financial services organisations in the world. Our international network has around 7,500 offices in 87 countries and territories across Europe, the Asia-Pacific region, North, Central and South America, the Middle East and Africa . In the UK , we employ 52 ,000 people and run a 1,250-strong branch network.

Financial Services Bill

The Financial Services Bill will fundamentally change the way banks and financial services firms are regulated in the UK.

This paper summarises the key issues and amendme nts that we believe are required to the Bill, in relation to the FPC , PRA and FCA, which we ask you to consider.

Executive S ummary

F inancial P olicy C ommittee (FPC)

· As currently drafted, the objective of the FPC is too narrowly focused on the avoidance of negative outcomes, without an overriding objective related to supporting the proper functioning of the economy.

· The FPC’s objective should parallel that of the MPC, and should focus on ensuring a stable and sustainable supply of finance to the economy ’, rather than the amorphous concept of ‘financial stability’ .

P rudential R egulatory A uthority (PRA)

Upper Tribunal

· The Upper Tribunal must be able to overrule the decision of a regulator (either the FCA or PRA), rather than simply remit it back for reconsideration by the regulator as the Bill currently proposes.

Accountability

· The PRA should be subject to the same statutory accountability requirements as the FCA, with a statutory practitioners panel which it is required to consult on rule changes as well as an annual public meeting for stakeholders . New section 2K(2) (clause 5) should be amended to provide tha t 'the PRA's consultation requirements must include the establishment and maintenance of a practitioner panel to represent the interests of practitioners' .

Financial Conduct Authority (FCA)

Fiduciary Duty

· Firms should not be subject to a fiduciary duty of care to consumers . A fiduciary duty would place the full author ity to transact on behalf of customers with banks. This would remove responsibility from customer s, create a situation where they no longer ha ve any motivation to behave responsibly, and could make it harder to establish a relationship of mutual trust.

· There are already certain situations in which firms owe a fiduciary duty to consumers, such as trusts, but these situations are very limited. In other circumstances , such as when firms give adv ice to consumers, there are duties which arise but these are to exercise reasonable skill and care rather than conferring a fiduciary duty .

Competition

· The FCA will become the lead competition regulator in the UK . We believe that it should be subject to similar procedural and appellate safeguards as other competition regulators in the UK .

Product Intervention

· The scope of the product intervention power is b road and the Bill should make clear that the power should only be exercised ‘where it is appropriate and proportionate, and where it will provide clarity to consumers and firms.’

· The safeguards in relati on to the FCA’s product intervention p ower need to be strengthened. In particular, firms should have the right to challenge a decision to intervene and a proper appeals mechanism against an FCA decision to use this power, besides judicial review.

Financial Promotions Power

· The FCA should be required to take into account the representations of individuals to whom a notice under this power is given.

· The FCA should not be required to publish details of a proposed notice if it decides to revoke it following representations.

Early publication of disciplinary action

· Firms should have the right to comment on early warning notices and whether their publication is appropriate. In addition, the FCA should be required to state , when it publishes a notice in spite of comments that it is not appropriate to do so, why it is not unfair to proceed with publication.

Panels

· We believe that the existing provision under FSMA (Section 11(3)) which requires the FSA to provide reasons in writing to the panels where it disagrees with a view expressed by a panel should be retained.

Further detail on each of these issues is below.

The Financial Policy Committee (FPC)

1. We support the creation of the FPC as we believe that it is sensible to have an over-arching regulator able to oversee the financial sector as a whole.

(i) Objectives and Accountability

2. We believe that the FPC’s objectives, as currently drafted, are too focused on the avoidance of negative outcomes by being based around an insufficiently-defined concept of ‘financial stability’. We believe that this could create an in-built bias to risk-aversion into the system, which is likely to be at the expense of the wider economy.

3. Furthermore, we believe that the accountability mechanisms proposed for the FPC are not sufficiently robust.

Key Points

· 4. The FPC’s objective should more closely parallel that of the MPC, and should focus on ensuring a stable and sustainable supply of finance to the economy . Within this, the FPC should be required to support the economic policy of HM Government, including its objectives for growth and employment.

· 5. The FPC’s accountability should mirror that of the MPC. The FPC should be required, whenever it undertakes any policy action, to write to the Chancellor and Chair of the TSC to explain the reasons for taking that action. This should include both a cost-benefit analysis and an economic impact assessment of its decisions.

The Prudential Regulation Authority (PRA )

6. We are broadly supportive of the approach and arrangements for the PRA, but there are certain amendments to the Bill that we believe could be made.

(i) The Upper Tribunal

7. The Upper Tribunal is the primary mechanism of redress for firms against the decision of the regulator. Currently, the Tribunal has the power to overturn the regulator’s decision, and this provides an essential check on its power and gives an appropriate level of protection for firms.

8. Under new section 21(6)(b) (Page 77) of the Bill, the power of the Tribunal will be changed so that it will no longer be able to overrule the regulator’s decision but simply:

‘[remit] the matter to the decision-maker with a direction to reconsider and reach a decision in accordance with the findings of the Tribunal.’

9. We believe that this represents an unjustified diminution of the po wer of the Tribunal and the appeals process. The phrase ‘in accordance with the findings of the Tribunal’ is broad enough to allow the FCA or PRA to depart from the Tribunal’s findings.

Key Points

· 10. We believe that the Tribunal’s powers should remain as they are under FSMA with the Tribunal able to overrule the decision of the FCA or PRA, rather than simply remit the decision back for reconsideration.

(ii) Accountability

11. T he PRA is currently not subject to the same statutory accountability requirements as the FCA and the FSA.

Key Points

· 12. The PRA should be required t o hold an annual public meeting with stakeholde rs, as the FSA is required .

· 13. To strengthen the PRA’s requirement to engage with practitioners we believe that it should have a statutory practitioner panel with which it is required to consult on proposed rule changes. New section 2K(2) (clause 5) should be amended to provide tha t 'the PRA's consultation requirements must include the establishment and maintenance of a practitioner panel to represent the interests of practitioners' .

The Financial Conduct Authority (FCA)

14. We are supportive of the more proactive regulatory approach that the FCA is intended to apply to conduct regulation, but we believe that the FCA’s powers and their safeguards could be strengthened .

(i) Objectives and a Fiduciary Duty

15. The Bill gives the FCA an operational objective to ‘secure an appropriate degree of protection for consumers.’ We support this objective; however some have argued that the FCA should, in pursuit of this objective, place a fiduciary duty of care on firms.

16. We do not believe it would be appropriate for the Bill to place a fiduciary duty on financial services firms in this way because :

· 17. A fiduciary duty would place the full authority to transact on behalf of the customers with banks. This would remove responsibility from customers, create a situation where the customer no longer has any motivation to behave responsibly, and could make it harder to establish a relationship of mutual trust. Imposing a fiduciary duty would create an extreme im balance in the share of responsibilities.

· 18. It is unlikely that a customer would understand the implications of a fiduciary duty, or would want to pass full responsibility to the bank if they did.

· 19. I t is unrealistic to assume that a bank would be in a position to know what is in the interests of every individual customer at a given time.

Key Points

· 20. We believe that the Bill should be left unchanged from its present form, and no fiduciary duty should be placed on financial services firms as it is unnecessary and unworkable.

(ii) Competition

Fair Process

21. The Government has decided that the FCA should have a prim ary operational objective to promote effective competition in the interests of consumers’. This will effectively mean that the FCA will become the lead competition regulator in the UK , and it is therefore essential that the FCA’s actions under its competition objective are subject to appropriate procedural and appellate safeguards . As currently drafted, it does not appear that there are any such safeguards in the Bill.

22. New s ection 138I (Page 93) sets out a general requirement for the FCA to consult on a draft of any proposed new rule and take account of representations made by third parties in response. However, the Bill gives the FCA wide discretion to dispense with these requirements. New Section 138L (Page 97) allows the FCA to disregard its requirement to consult whenever it considers that the delay involved ‘would be prejudicial to the interests of consumers.’ This is a very low threshold to set for dispensing with the right of interested parties to make representations before a decision is made, which is a basic and essential right of fair process. It is a much lower threshold than is applied to the other competition authorities such as the OFT and Competition Commission under the Enterprise Act 2002 .

23. In addition, Section 395(2) of FSMA 2000 embodies the principle that regulatory cases should not be taken by individuals directly involved in establishing the evidence for that decision. The FSA set up the ‘Regulatory Decisions Committee’ for this purpose. However, this section also gives the FSA the power to depart from this principle ‘if necessary to protect the interests of consumers.’ We believe that this should only be permitted in exceptional circumstances.

Key Points

· 24. The FCA should only be able to dispense with the requirements to consult in new Section 138I (Page 93) and the principles laid down in Section 395(2) of FSMA 2000 in exceptional circumstances where risk of harm to consumers outweighs the right of fair process.

Price Regulation

25. There is currently a lack of clarity as to whether the FCA will, under its competition objective, be able to consider the prices of products when determining whether a market is competitive. HM Treasury have stated that the FCA is not intended to be a price regulator like some utilities regulators . However, the FSA Approach Document on the FCA said that its powers will be exercised following an assessment of prices and charges. We are therefore concerned that the FCA could use its general rule-making powers to make price-related interventions. Absent clarity on the FCA’s powers, there is a real risk of an increasingly uncertain environment with unintended consequences, including defensive firm behaviour which is damaging to the markets and consumers.

26. We believe that price regulation and controls could have an adverse impact on competition, innovation and choice for consumers. If products are transparent and easily comparable, competition between providers should keep prices low, without the need for price interventions.

Key Points

· 27. It should be written into the Bill that the FCA is not a price regulator in order to provide clarity to firms and the FCA.

( i i i ) Product Intervention

28. The FCA will have the power to issue permanent or temporary product intervention rules under the Bill. Under the temporary rule-making power the FCA will be able to ban a product for up to 12 months without consultation or cost-benefit analysis (Section 138M , Page 97 ) . W e believe that the safeguards currently proposed in the Bill are insufficient to ensure fair process.

Scope

29. The scope of this power is extremely broad. We therefore welcome the statement from the Government in the Treasury White Paper that it intends this power to be used ‘where it is appropriate and proportionate , and where it will provide clarity to consumers and firms .’ However, this phrase does not appear anywhere in the Bill. Furthermore, the Bill currently allows the FCA to use its product intervention power in order to advance not just its ‘consumer protection’ operational objective but also its ‘competition’ operational objective.

Key Points

· 30. The Bill should include a clear statement that the FCA’s product intervention power should be used ‘where it is appropriate and proportionate’ and only in exceptional circumstances.

· 31. We believe the FCA should be able to exercise this power only under its ‘consumer protection’ objective . This is because, as the Government has clearly stated, the purpose of this power is to protect consumers from products that are causing or are likely to cause mass consumer detriment. It is therefore logical that it should be exercised under the ‘consumer protection’ objective.

· 32. The ‘competition’ operational objective should be treated in the same way as the ‘integrity’ operation al objective – the FCA should only be able to exercise the product intervention power under either of them if the Treasury by order authorises it to do so.

Appeals and Consultations

33. There is currently no ability for firms to make representations to the FCA before it exercises the temporary product intervention power, nor is there any appeals mechanism for firms against a decision by the FCA to exercise this power, other than judicial review. In addition, the Bill states that the FCA will be able to make further temporary product intervention rules containing the same provision as a previous rule once a ‘prohibited period’ of 12 months has elapsed since the initial rule expired (Section 138M (5) and (6) , Page 98 ). This means that the FCA could, in theory, ban a product for 12 months, wait a further 12 months, and then ban the same product again, all without any consultation or cost-benefit analysis. We believe that this would be tantamount to exercising the permanent product intervention power but without the same safeguards.

Key Points

· 34. Firms should have the right to make representations to the FCA on a decision to exercise the product intervention power before it takes effect and the FCA should be required to take thos e representations into account, as op posed to ‘have regard’ for them ( New s ection 138I(3), Page 94) .

· 35. There should be a clear mechanism through which firms can appeal against a decision by the FCA to exercise its permanent or temporary product intervention power written into the Bill, ideally through the Upper Tribunal. The Tribunal should be able to consider the underlying merits of a case.

· 36. We believe the ‘prohibited period’ after which the FCA will be able to effectively re-issue a product intervention rule should be removed from the Bill. The FCA should instead be required to conduct a consultation and cost-benefit analysis during the initial period for which a product is banned. If the FCA decides as a result that it does not intend to make the temporary ban permanent, it should be required to discontinue the ban even if it has not yet expired. The FCA should only be able to reintroduce a temporary ban of a product that has already been subject to a previous ban if there has been a material change in circumstances.

(i v ) Financial Promotions Power

37. We support the FCA’s propo sed financial promotions power but we believe that

additional safeguards are required.

Key Points

· 38. We believe that there should be a formal requirement placed on the FCA in the Bill to consider and take into account the representations made by the person to whom the notice is given.

· 39. As currently drafted, the Bill allows the FCA to ban a financial promotion that has not yet been published if it believes it is likely to contravene financial promotions rules. We believe the FCA should only be able to do this if it believes the promotion would contravene the rules.

· 40. The Bill also requires the FCA to publish information about a direction to ban a promotion, even if the direction is revoked following consideration of representations. We believe this will inflict unjustified reputational damage on a firm. We believe the Bill should be amended to expressly prohibit the FCA from publishing information on a direction that has been revoked.

(v ) Early publication of disciplinary action

41. The publication of an early enforcement warning notice could inflict significant unjustified reputational da mage on a firm before it has the opportunity to challenge the accuracy of the facts. However, we accept that the Government is determined to give this power to the FCA and so we believe that there are some constructive amendments that could be made to the Bill to strengthen its safeguards.

Key Points

· 42. We believe that firms must be given the express right to comment on the notices and whether publication is appropriate (as opposed to simply being consulted) and the FCA should be required to consider and take into account those comments.

· 43. We also believe that if the FCA publishes a notice in spite of comments that it is not appropriate to do so, it should be required to explain why it is not unfair to proceed with publication.

· 44. We believe that when determining the fairness of publishing a notice, the FCA should be required to take into account indication of a challenge to the notice as well as reputational impact.

· 45. We also believe that provision should be made in the Bill to require the FCA to state in any information that it publishes that it is an early warning notice and the right to dispute has not yet been exhausted.

(vi ) Panels

46. Under new Sections 1P and 1Q o f Clause 5 (Page 22), the FCA will be re quired to set up a practitioner panel and consumer panel to represent the interests of these two groups. New Section 1R of Clause 5 (Page 23) will require the FCA to take the se

panels’ representations into account and ‘from time to time publish in such a manner as it thinks fit responses to the representations’ .

47. We believe that these requirements are a dilution of the existing requirements currently placed on the FSA under FSMA 2000. Section 11(3) of FSMA states that ‘if the Authority [the FSA] disagrees with a view expressed, or proposal made, in the representation, it must give the Panel a statement in writing of its reasons for disagreeing.’ Under the Financial Services Bill, the FCA will be under no such duty to explain its reasons for disagreeing with a view or proposal from either of the Panels.

Key Points

· 48. We believe that the current wording under FSMA 2000 should be retained, and the FCA should be required, just as the FSA is, to provide a statement in writing of its reasons for disagreeing with a view or proposal from the Panels.

March 2012

Prepared 8th March 2012