Appendix: exchange of letters between
Lord Turner, Chairman of the FSA, and Marcus Agius, Chairman of
Barclays, 2012
Letter from Lord Turner to Marcus
Agius, 10 April 2012
As promised, this letter follows up our recent
meeting and sets out FSA concerns relating to aspects of Barclays'
approach to regulatory and other issues.
Obviously where we have specific areas of concern
which merit it, our Supervisory Team will directly make those
concerns known at the appropriate level, and require any appropriate
action in response. The purpose of my meeting with you was therefore
not to focus on any one specific issue which requires remedial
action. Rather I wished to bring to your attention our concerns
about the cumulative impression created by a pattern of behaviour
over the last few years, in which Barclays often seems to be seeking
to gain advantage through the use of complex structures, or through
arguing for regulatory approaches which are at the aggressive
end of interpretation of the relevant rules and regulations. Andrew
Bailey also expressed these concerns at your Board meeting on
9th February.
The specific examples which I mentioned at our
meeting included two examples which I accept are 'old news', but
also four relating to recent events.
· The development of the Protium structure
in 2009 which, although not delivering Barclays any regulatory
capital advantage and while within accounting rules, was perceived
by many external commentators as a convoluted attempt to portray
a favourable accounting result.
· The approach to the valuation of monoline
CVA positions which became apparent in FSA analysis in early 2009,
and which showed Barclays choosing valuations clearly at the aggressive
end of the acceptable spectrum.
· Our concern that in the run up to
the latest year-end, Barclays was not fully transparent with us
about the RWA impacts of a proposed extension of model approaches
(AIRB and IMM) applied in Barclays Capital Inc. Ultimately, we
felt that the need for us to unpick the real impact of these proposed
changes caused unnecessary friction and burdened our internal
processes.
· Protracted communication between ourselves
and Barclays about your desire to move index hedges of own credit
from the trading book to the banking book, with the impact of
materially reducing RWAs. In this case, after the initial outcome
was not resolved in Barclays' favour, our team felt that Barclays
continued to argue for capital optimization in a way which inefficiently
used up our resource and goodwill.
· The confusing and potentially misleading
impression created by Barclays' initial presentation of its position
under the EBA stress tests, which appeared to be an attempt to
leave FSA senior management with the impression that Barclays
would be above the then intended 10% CT1 threshold, whereas at
the relevant date of September 2011 it was actually at 9.8%. In
fact given that the eventually chosen 'pass mark' was 9%, this
did not turn out to be of crucial importance. But it nevertheless
left our senior management with an impression that Barclays were
seeking to 'spin' its messages in an unhelpful fashion.
I also mentioned at our meeting the recent publicity
in relation to Barclays UK tax management. I recognise that since
adequate provisioning had been put in place, this was not a regulatory
issue per se. But as I know you recognise, and whatever the extent
of advice which Barclays received in advance, the net impact has
clearly been unfavourable to the degree of external trust in Barclays'
approach to issues such as tax, regulation and accounting.
Clearly these examples vary in both currency
and importance. And it is of course acceptable for a bank to argue
for a favourable approach on any one specific issue, even if the
regulator does not immediately agree. But the cumulative effect
of the examples set out above has been to leave us with an impression
that Barclays has a tendency continually to seek advantage from
complex structures or favourable regulatory interpretations. These
concerns are sufficiently great that I felt it was appropriate
to communicate them directly to you, and to urge you and the Board
to encourage a tone of full co-operation and transparency between
all levels of your Executive and the FSA.
I know from our conversation that you take these
issues seriously.
Letter from Marcus Agius to Lord
Turner, 18 April 2012
Thank you for your letter of 10 April, 2012.
It is a matter of regret for us that you have
the concerns outlined in your letter. Barclays has invested significant
effort and time in building and improving its relationship with
the FSA. It is very important to us to have a strong, open, cooperative
and transparent relationship with the FSA and with all of our
regulators globally. The Board and I took note of Andrew Bailey's
comments in our February meeting and, while he specifically excluded
Bob Diamond and Chris Lucas from his comments, it was clear that
"tone from the top" is one of the FSA's concerns. Our
objective is and has always been to have a strong and mutually
beneficial relationship with the FSA and you have my commitment
that we will work harder in the future to procure this outcome.
Your letter notes six examples of areas of concern
to the FSA and without wanting to prolong the debate on these;
I do feel the need to make one or two comments in relation to
these specific points.
· With regard to Protium, I believe
this has been discussed exhaustively. As you know, we reconfirm
that our objective at the time was to change the repayment profile
and maximize shareholder value. As it turned out, this is exactly
what occurred. As you note, this was done within accounting rules
and with no regulatory capital advantage and with explicit FSA
approval.
· The monoline CVA positions from 2009
represent a highly subjective area where we are and were aware
of at least one other major European based bank which had valuations
very similar to Barclays. As you note, these valuations were within
the acceptable spectrum. Time and markets have proven these to
be less aggressive than suggested.
· On the more recent experience of the
run up to year-end, we recognise that we asked a lot of your team
with regard to model approvals. These were waiver requests which
came about later than expected but they were necessary given the
late changes to our capital guidance at year end via the FPC to
FSA. A guideline of 10% was moved to 10.30% at the very end of
the year and so the criticality of these model approvals was paramount
for us. We greatly appreciate the time and effort contributed
by your team to facilitate these reviews.
· The discussions surrounding the index
hedges of own credit were protracted because we had very strongly
held views. Of course, the FSA has the ability to set rules and
we respect the outcome of those discussions.
· We believe the concern you mention
regarding capital stress tests refers to two separate but parallel
requests from last year to assess the effect of EBA capital definitions:
1) an FSA request to ascertain whether 10% CT1 could be achieved
by mid-2012 using a constant balance sheet and Basel 2.5 for December
2011 and 2) an EBA stress test request to estimate CT1 for June
2011 assuming the early adoption of Basel 2.5. Although both requests
were related, we thought we were clear where differences existed
in our responses because of the slightly different requests. We
did not intend to mislead in any way and we will ensure that we
communicate more clearly in the future.
Finally with regard to the UK tax issue, we fully
understand the potential damage to our reputation. On the other
hand, as tested recently through a third party review, our tax
procedures are robust and sound but no procedure can guard against
retroactive tax law changes. We acknowledge that this is not a
comfortable place for us to be. Despite our voluntary disclosure
to HMRC of the transactions, they did not inform us of their intention
to change the law.
I appreciate your taking the time to write. I
can assure you that the points you have raised have my full attention
as well as the Board's. We are committed to ensuring the full
cooperation of all levels of our Executive when engaging with
the FSA and we take these matters very seriously, particularly
as they relate to the transparency and openness of our interactions.
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