Appendix: Government Response
Letter from Andrea Leadsom MP, Economic Secretary,
HM Treasury, dated 19 January 2015
I am writing to you with regard to the Statement
published on 17 November 2014 by the former members of the Parliamentary
Commission on Banking Standards (PCBS), a body that you chaired.
This Statement accompanied the Treasury Committee report on implementation
of the PCBS's recommendations.
The government welcomes these publications. We agree
that a great deal of progress has been made since the Commission's
final report and that it is essential that momentum is maintained
in implementing the UK's financial services reforms. The Treasury
Committee's report is a comprehensive reminder of the amount of
incredibly productive work undertaken by the PCBS itself, this
government, both Houses of Parliament and the regulatory authorities.
This work was necessary, and will continue through implementation
and reviews, both ongoing and upcoming.
In this response to the Statement of the former members,
the government is setting out its thoughts on conclusions as appropriate.
The government notes the issues raised which are directly for
the Prudential Regulation Authority (PRA) and Financial Conduct
Authority (FCA) to consider and take forward in their respective
roles.
Ring-fencing, resolution and proprietary trading
The government welcomes the views of the former members
of the PCBS on ring-fencing, with its consideration of
electrification, the forthcoming review and ongoing implementation.
On 'electrification' specifically, the government has implemented
the changes suggested by the PCBS, having "electrified"
the ring-fence by giving the PRA a power to initiate the breaking
up of a banking group subject to ring-fencing with HM Treasury's
consent. The government agrees with the virtues of an independent
review of ring-fencing after the regime has come into force.
The government notes that the Statement welcomes
the work proposals for secondary legislation. This legislation,
and its implementation, is required to ensure successful ring-fencing
and the government remains on track to have all ring-fencing legislation
in place by the end of this Parliament in 2015. The government
supports the ongoing work being carried out by the PRA to implement
ring-fencing, including the work being done, for example on the
structure of ring-fenced banks, and the work that will be done,
for example on setting restrictions on financial transactions
between ring-fenced banks and other group members. When designing
and introducing rules the PRA will look to minimise or prevent
any risks that could present a serious challenge to the stability
of ring-fenced banks.
Moving on to the Statement's conclusions around "crucial"
resolution measures, the government is pleased to report
on the significant progress since the Commission published its
final report. The government has introduced reforms to implement
the European Bank Recovery and Resolution Directive—most
importantly, by amending the bail-in powers in the Financial Services
(Banking Reform) Act 2013 to ensure full consistency with the
Directive. This ensures that all EU banks are subject to a common
set of resolution powers, and the same conditions and safeguards
on the use of those powers.
The government fully supports the outcomes of the
G20 summit in Brisbane in November 2014, where leaders agreed
proposals for an international standard on total loss-absorbing
capacity (TLAC) for global systemically important banks (G-SIBs).
The FSB will now undertake comprehensive impact assessment studies
to inform the calibration of the requirement, with a commitment
to finalise the proposal by the next G20 Leaders' Summit in 2015.
As the conclusions accurately note, cooperation between
authorities is a key part of ensuring that resolution is achievable
for large, cross-border banks. Recognising this, the FSB continues
to prioritise cooperation between authorities- through the formation
of crisis management groups; and the development of institution-specific
cooperation agreements. In addition to this, work continues to
ensure that authorities can recognise and support resolution actions
taken by foreign authorities.
The government strongly welcomes the work undertaken
so far, and while we acknowledge the views of the former members,
we believe the international community is on track to ensure the
resolution regime will be effective and positioned to pass future
tests.
The government agrees with the conclusions around
the need for cooperation between banks and the regulators in drawing
up resolution plans. It is for this reason UK banks are required
to cooperate with the authorities in the development of resolution
plans, and with the Bank of England in planning to exercise, or
in actually exercising, any of its resolution powers.
We note the views expressed in the conclusions on
proprietary trading. The government agreed with the PCBS
about the potential risks around this issue and took forward that
support through the legislation outlined in the Statement.
New regulatory regimes for individuals
The government broadly accepted the conclusions of
the final PCBS report and as a result made changes to the legal
framework (mainly amendments to Part 5 of the Financial Services
and Markets Act 2000) in the Financial Services (Banking Reform)
Act 2013, which received Royal Assent in December 2013.
Since then the government, the PRA and the FCA have
been working on the detailed measures (secondary legislation and
regulatory rules) to implement the reforms, this work will be
completed in 2015.
Specifically with regard to the scope of the 'Senior
Managers Regime' (SMR), the government agrees that the correct
way to adjust the scope of the criminal sanction[1]
is through adjusting the coverage of the SMR. The SMR is intended
to cover those responsible for managing a bank and it is appropriate
therefore that the criminal sanction should also potentially apply
to them. The government recognises the concerns about the inclusion
of non-executive directors (NEDs) in the SMR, but it notes that
NEDs are full members of a company's board and can be involved
in critical decisions affecting its future. In addition, as stated
by the conclusions, issues around scope and responsibilities
will be taken forward by the regulators and their work in this
area is welcomed.
The government notes the conclusions on the scope
of the Certification regime and the role of banks within
it, and leaves this issue to the regulators as legislated. Similarly,
there is a need for meaningful rules in the area of conduct,
however it is ultimately for the regulators to determine them
and then to revise or review them as necessary.
The government also notes conclusions in respect
of the extension of the SMR to the rest of the financial services
industry, and the abolition of the Approved Persons Regime.
This is being considered as part of the Fair and Effective Markets
Review. Further primary legislation would be needed to extend
the SMR (and the Certification Regime) to the financial services
industry outside banking.[2]
The government agrees that, if this proposal were taken forward,
it would be appropriate to consider how these regimes should be
applied outside banking, and also to learn lessons from their
application to banking.
Remuneration
The government and regulators broadly endorsed the
conclusions of the PCBS with regard to remuneration and the regulators
stated their intention to consult on a revised Remuneration Code
in 2014. We worked closely with the PRA and FCA in the lead up
to their July 2014 consultation on this topic.
On clawback, following its consultation we
welcome the PRA's regime whereby vested bonuses can be clawed
back in certain circumstances. These rules are now in place, and
bonuses can now be clawed back for seven years after they are
awarded.
As regards conclusions on deferral, and the
Statement's view that deferral periods could be lengthened, this
government is supportive of measures to ensure the reduction of
incentives to take excessive risk, and measures such as deferral
have been a key instrument in restructuring remuneration. We welcome
the work of the regulators in this area following our instructions
that they consult on this issue, and it was their July 2014 consultation
that proposed deferral of no less than five years (seven years
for Senior Managers), vesting at a pro rata rate to avoid front-loading,
and for Senior Managers, no vesting for at least three years.
The consultation also noted that the regulators feel they already
have adequate powers under FSMA to require longer deferral if
it was felt necessary for a particular firm.
The conclusions on scope recommend the application
of the PCBS remuneration proposals beyond 'material risk takers'
to a wider set of individuals. The rules in the proposed Remuneration
Code reflect the government's view that extending the scope would
go significantly beyond international standards and could result
in inappropriately strict regulation of the pay of relatively
junior staff, and this is a view we maintain alongside the regulators.
Our view is that the potential changes consulted on by the regulators
to implement PCBS recommendations are prescriptive and appropriate
only for individuals whose actions may have a material impact
on the risk profile of a firm.
With respect to payments to bailed out banks and
the stated view that the regulators should "go further"
than their July 2014 consultation, this is a matter for the regulators
to take forward. The government agreed with the PCBS recommendation
for the introduction of regulatory power to void or cancel entitlements
for certain discretionary payments for banks receiving direct
taxpayer support and as a result we asked the PRA to consider
what more could be done in this area.
This government strongly believes there should be
no rewards for failure in the banking sector, and will keep the
regulators' power under review in this regard to ensure their
adequacy.
Competition
With respect to regulation and competition,
the government agrees with the Statement, it being essential that
the financial regulators treat competition in banking markets
as a priority. That is why the government provided the FCA with
both a statutory competition objective and a duty as part of its
remit, and accepted the PCBS's recommendation the PRA also be
given a secondary competition objective. In addition to providing
the PRA with this competition objective, the Banking Reform Act
2013 also gave the FCA strong additional powers on competition
and created a new Payments Systems Regulator, which will look
at competition issues concerning access to payments. Both the
FCA and PRA have already taken action on competition, including
by lowering barriers to entry for new and smaller banks, and are
required to report against their competition objective as part
of their annual reporting. We also note the suggestions that Parliament
should be alert to risks of regulation on competition.
These changes are only part of a wide-reaching programme
of reforms that have been implemented by the government to make
the banking sector more competitive so individuals and businesses
get a better deal. This includes measures to support competition
and switching in current accounts, such as a Current Account Switch
Service to give consumers the power and confidence to vote with
their feet; and new legislation through the Small Business, Enterprise
and Employment Bill to improve competition in the provision of
finance to smaller businesses.
However, competition issues in key retail banking
markets are longstanding and there remains work to be done. That
is why the government welcomed the Competition and Markets
Authority's (CMA) decision to progress with market investigations
into both current accounts and SME banking. The CMA was created
by this government to take forward high-impact work such as this.
Moving on to basic bank accounts and the views
set out in the Statement, this government believes that it is
vital that banks offer products which are suitable for day-to-
day transactions for all consumers. In December, the government
announced the conclusion of a significant process of negotiation
with nine major current account providers to provide new basic
bank accounts by the end of 2015, including a commitment to remove
unpaid item fees and prevent unauthorised overdrafts and overrunning.
Accounts will be available to anyone who doesn't already have
a bank account or who cannot use their existing account due to
financial difficulty. Basic bank account customers will now also
be offered services on the same terms as other personal current
accounts that the banks provide, including access to all the standard
over-the-counter services at bank branches and at the Post Office,
and access to the LINK ATM network. The terms of the agreement
have been published online[3]
so that customers and consumer groups have a clear understanding
of what they can expect from the participating banks and building
societies.
Better regulation
The Treasury has completed its review of enforcement
decision-making at the regulators, and published its report on
18 December. The review expressly considered issues raised by
the PCBS and stated here in the conclusions, including those on
a further decision-making body and issues around the burden of
proof.
Recommendations were made to ensure that cases are
only referred for enforcement investigation where that is considered
to be the right regulatory response, following consideration of
appropriate, alternative supervisory responses by senior regulators.
The review also concluded that the PRA's executive-led
decision-making model did not offer the perception of functional
independence and objectivity necessary in contested cases. The
creation of an independent PRA enforcement decision-making committee,
with a senior legal chair, was therefore recommended.
There was strong support in consultation for the
FCA Regulatory Decisions Committee (RDC). That is partly why the
review did not favour the creation of a specific, banking RDC
for FCA and PRA cases, as called for by the PCBS. However, the
review also considered that, given the regulators' distinct statutory
objectives and areas of regulatory focus, their decision-makers
were likely to require expertise in different areas. The review
also found merit in each regulator retaining discretion to design
their own processes to meet their respective strategic and operational
requirements.
Nevertheless, the review made recommendations to
ensure annual reporting by the regulators' decision-making committees,
and parliamentary accountability for the chairs, if the Treasury
Committee wishes it. It also recommended that the regulators put
in place a clearly sign-posted, expedited procedure to enable
the subjects of enforcement decisions to access the Upper Tribunal
directly, if they prefer to challenge enforcement cases in a tribunal
environment, where they can call oral evidence and cross-examine
witnesses.
The government found that full cooperation between
the supervision and enforcement regulatory functions was critical,
and that institutional separation of those functions would be
likely to imperil that cooperation. That is because distinct organisations
with different objectives and divergent priorities would impair
the identification of the right regulatory response, both in specific
cases, and in respect of wider, emerging risks.
A further recommendation in the report is that the
contested case decision-makers should regularly review the regulators'
processes in settled cases. In doing so, the decision-makers should
seek comments from all, or a sample of those who have settled
FCA and PRA enforcement cases, and speak with the relevant enforcement
staff. The decision-makers will be able to monitor the effectiveness
of the recommended changes to the settlement process, identify
process lessons and make generic, public recommendations, to ensure
that the process continues to function effectively.
The enforcement review recommends that the regulators
should consult on, and issue clear guidance in respect of the
application of the reverse burden of proof in due course. However,
it is the government's view that it is premature to consider whether
additional scrutiny may be necessary. Subjects already have unfettered
access to the Upper Tribunal, and the recommendations of the enforcement
review will promote more direct access where subjects prefer to
challenge the regulator in that venue. Moreover, taken together,
the recommendations will generally help to ensure fairness and
accountability in enforcement decision-making by the regulators.
The government notes the issues raised on mis-selling
at the point of sale and agrees on the potential consequences
around retrospective interpretation of rules. We look forward
to seeing the outcomes of the FCA's work in this area.
The government agrees with conclusions on leverage
ratio requirements, and believes that that the Financial Policy
Committee (FPC) is best placed to make decisions on this issue.
The government notes that the calibration put forward by the FPC
means that leverage ratio requirements would be a supplement to,
not a replacement for, existing risk-weighted capital ratio requirements.
We also share the view that the FPC should exercise its judgement
as outlined, financial stability need not come at the price of
a material restriction in the ability of the financial sector
to contribute to economic growth, and it is enshrined in the operational
objectives of the FPC that it must pursue financial stability
in support of the economic objectives of the government.
On regulatory accounts, the government supports
the work of the International Accounting Standards Board and its
long term goal of a single set of high-quality accounting standards.
We similarly look forward to seeing the outcomes of the Bank of
England's consultation, which will need to have a firm grounding
in cost-benefit analysis.
The government welcomes the former members' continuing
interest in regulatory fees and the cost of regulation,
and notes the role of the Treasury Committee in monitoring and
scrutinising the regulators' ongoing operating costs.
The conclusions on the ongoing HBOS review
are noted. The government welcomes the work the PCBS had previously
done to shed light on the factors that contributed to HBOS's failure
and the subsequent need for government intervention, and looks
forward to the publication by the FCA and PRA of their inquiry
into the failure of the HBOS.
We believe that the work undertaken, alongside the
work in hand, is comprehensively addressing problems with banking
standards that have done so much to undermine society's faith
in the banking system.
The government is grateful to the PCBS, and to you
as its Chairman, for its important contribution to this extensive
and necessary work, in terms of its hugely intensive reporting
and also the guiding hand that it placed on the development and
implementation of measures that will enhance the soundness and
stability of the banking sector. The (Financial Services) Banking
Reform Act 2013 would have taken a very different shape in the
absence of the PCBS and its input endures.
1 See sections 36 to 38 of the Financial Services (Banking
Reform) Act 2013. Back
2
The government has the power to extend the Senior Managers Regime
and the Certification Regime
(but not the criminal sanction) to
UK branches of foreign credit institutions and investment firms
by
statutory instrument. The Treasury
issued a consultation on this on 17 November 2014. Back
3
www.gov.uk/government/publications/revised-baslc-bank-account-agreement Back
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