Financial Services Bill

Memorandum submitted by the City of London (FS 13)

The Corporation contributed to the pre-legislative scrutiny of the draft Bill by the Joint Committee and circulated a briefing to a number of Members ahead of Second Reading. The City’s interests in the Bill are therefore a matter of public record as part of the written evidence published alongside the Joint Committee’s report. I shall not, therefore, repeat them in full. However, before the Public Bill Committee completes its consideration of the Bill, it may be useful for the Committee to have a summary of the issues raised by the City.

In its previous submissions, the City highlighted its strong belief in a regulatory structure for UK-based financial services that will enhance the stability of the financial system, restore public confidence and safeguard the competitiveness of the sector. Confidence in the financial services sector’s ability to generate growth has been dented and maintaining the status quo in terms of financial supervision is not a realistic option. The need for adjustment to the regulatory framework is widely acknowledged as being necessary. Parts 1 and 2 of the Bill go some way to achieving this.

However, a particular concern aired was that, under what is now Clause 12, firms may be faced with being supervised by two separate regulators, since it appears that the authorisation of firms and individuals will be an overlapping responsibility between the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA). There is also a risk in the new structure of separate and distinct rulebooks being produced by both the PRA and the FCA, and the City believes a single and consistent rulebook is essential for all regulated entities.

The Government consultation that preceded the Bill implied that the main dangers that the changes in regulatory structure were designed to address were bank or building society failures on the pattern of the events of 2007-8. 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 setting a mandatory defined threshold.

The proposed changes in the UK’s regulatory structure will of course take place as rule-making powers move from domestic authorities to the new system of EU-wide supervisory institutions. The banking supervisor is based in London and 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. However, the UK authorities appear to be playing down the role of the ESAs, which could undermine the development of sound and effective regulation at the EU level if this results in the UK being less engaged.

The City has previously supported the requirement for the FCA (and other regulatory bodies) to have regard to the competitiveness of the UK financial service sector but this does not appear to be included in the current version of the Bill. Proper and effective regulation is essential for financial stability and both domestic and international trust and confidence and is the main mandate for the new authorities. It is however important that they should share the responsibility of HM Treasury to promote the competitive position of the sector, as a major contributor to employment, export earnings and tax revenue. Domestic economic growth and the maintenance of the UK’s global trading capacity require access to a competitive and liquid financial services sector. It is essential that the sector is not undermined by regulatory requirements and approaches which exceed in their prescriptive nature those of partners and competitors.

March 2012

Prepared 22nd March 2012