Banking StandardsWritten evidence from the Financial Services Authority

At our evidence session on Monday you asked us to articulate the points that would be useful to introduce in the draft Bill. We have set out below further elaboration on two points: (i) the interaction between the PRA statutory objectives, and (ii) the Ring-Fenced Bank (RFB) directors’ statutory duties. The table in the Appendix to this letter summarises the key points that we made and builds on our written submission.

We agree with the PRA being given a new statutory objective regarding the continuity of core banking services. However, we believe it would be useful to have a better narrative regarding how the PRA’s safety and soundness and continuity objectives interact. In our view, the continuity objective should be a subset of the safety and soundness objective, which would better contribute to the desired clarity of purpose for the PRA. However, the draft Bill instead implies that if there is a clash the continuity objective would prevail over the safety and soundness objective. It is not clear what this means. As a result, there is a risk that the Bill is creating an expectation that might not be fulfilled.

As I mentioned briefly in our evidence session, it is our view that the draft Bill should specify that RFB directors, and potentially the directors of other appropriate entities in the group that have influence over the RFB, should have a legal obligation to ensure the integrity of the ring-fence. This obligation would, as an example, require directors to protect the RFB from contagion from the wider financial system. This would include risks arising from the rest of the banking group.

If you have any questions on this, please let me know.

Andrew Bailey
Managing Director
Prudential Business Unit

APPENDIX

The following table includes five suggestions to add further substance to the bill:

	Recommendation	Bill Reference
1	The draft Bill should clearly set out how the PRA’s statutory objectives interact and their hierarchy.	Section 2
2	The draft Bill should enable the PRA to have a power to make rules over UK financial holding companies.	New addition
3	The draft Bill should enable HM Treasury to prohibit non ring-fenced banks (NRFBs) from owning ring-fenced banks (RFBs) as well as RFBs from owning NRFBs.	Section 4 (142E & 142H subsection 2)
4	The draft Bill should state that loss absorbency capacity should apply on a group basis, with the ability to exempt non-EEA subsidiaries only once the group has demonstrated that these operations will not pose a risk to UK financial stability.	Section 4 (142J)
5	The draft Bill should specify that the directors of a ring-fence bank and potentially other appropriate entities in the group should have a statutory objective to ensure the integrity of the ring-fence. This could involve ensuring that the directors have an obligation to protect the ring-fence bank from contagion from the wider financial system. This would include risks arising from the rest of the banking group.	New addition