Banking Standards

Cover letter from The CityUK (S026)

We are writing on behalf of TheCityUK (a national membership organisation representing the UK’s financial and related professional services sector). Our members are drawn from across the banking, insurance, asset management, legal, accountancy and other related areas of a sector which employs 2 million people.

We recognise that London’s position as the pre-eminent international financial services centre requires firms to act to the highest standards at all times. Misconduct at any one major firm can affect the perception of the whole sector to the detriment of everyone.

TheCityUK, therefore, deeply regrets the behaviour and actions that may have taken place in parts of certain banks which has led to the Tyrie Commission being set up and to criticism by a number of regulatory authorities. Any individual implicated has to suffer the consequences. If their behaviour has been exacerbated by the culture or the incentive arrangements within their organisation, this must be addressed urgently by Boards and their shareholders, and changes implemented as necessary. There is no evidence that such bad behaviours are endemic in all financial services organisations but we are reminding our members that ethical behaviour is an absolute essential for any financial services firm. Not acting within the spirit of rules, or worse flouting them, can never be justified. Any responsible practitioner should know what kinds of behaviours are unacceptable.

We will be working with the Boards of all our member companies to help ensure that ethics and responsibility are always at the forefront of their minds.

The rate of change in the sector since the financial crisis has been considerable. Domestic, European and international regulation are driving change – and are having a meaningful impact. The sector continues to seek to rebuild its reputation by more clearly demonstrating its role in serving its business and personal customers and clients. We believe that the Boards of companies are best placed to deliver further change by working with shareholders, regulators and policymakers.

We encourage the Commission to be mindful of the international competitiveness of the sector and its position as the nation’s leading net export earner, its role nationally as a major employer, and the fact that the sector has many different aspects to it that extend well beyond banking (insurance, asset management, investment etc.) when conducting its deliberations. We believe that avoiding unintended consequences and determining the impact of any proposals you make will ensure the sustainability of the many benefits which our society can and does obtain from our industry. That industry has many interdependencies, banking being only one part, but all benefit across the entirety of the UK, in every region, from the success of that industry.

We believe the Commission is timely as it offers a chance to look to the future of financial services, clarifying the changes made and underway, and highlighting the role the sector plays in helping our nation’s economy prosper.  We consider it critical that the sector, its regulators, its customers and clients focus on the future.  Our vision is for the sector to put the unhappy past behind it and move forward in doing all that it can to grow the economy and to help businesses and individuals to thrive.

We attach the initial evidence being submitted to the Parliamentary Commission by Chris Cummings, Chief Executive, TheCityUK.

Submission from TheCityUK

Summary

· The UK’s future prosperity depends on driving growth by investing in innovation and creating new jobs, and maintaining improvements in living standards even as our society ages. A strong financial and professional services sector enjoying confidence and trust is key to these goals.

· It is crucial that firms and individuals adhere to the highest standards at all times, not just because this is right in itself, but also because of the impact a reputation for honesty and fair dealing has on the standing of the sector in overseas markets.

· There have undoubtedly been failures of management control and the sector is committed to learning the lessons of past mistakes. Alongside the seriousness of the crisis and of recent failings, it is also important to acknowledge that many organisations, and their thousands of employees, continue to serve their customers in an ethical and conscientious manner.

· The question of ascribing recent scandals to individual misconduct, misaligned incentives, cultural problems or institutional issues is a complex one. What is certain is that good governance, appropriate incentivisation, and professional standards can foster ethical conduct and long-term value in organisations.

A number of important legislative and regulatory initiatives are underway. The Parliamentary Commission is well placed to consider this wide-ranging programme of regulatory reform holistically and to suggest areas where additional reform is required so that the financial services sector may move forward in making changes and rebuilding its reputation.

Introduction

1. TheCityUK is a national membership organisation representing the UK’s financial and related professional services sector. Our members are drawn from across the banking, insurance, asset management, exchange and other financial and related professional services sectors. Our purpose is to promote and explain the role and value of the sector in society and the economy, and to promote the sector abroad. TheCityUK’s members are committed to:

· Restoring public and policymaker confidence in the financial services sector.

· Fully implementing the regulatory reform programme that is underway, alongside necessary cultural changes.

· Demonstrating the crucial contribution of financial and related professional services to economic growth, the lives of people in Britain and the UK’s place in the world.

2. We are committed to these objectives because we believe them vital not just to the sector but to the success, sustainability and long-term growth prospects of the UK economy.

3. We welcome the establishment of the Parliamentary Commission on Banking Standards. As you are aware, a number of important legislative and regulatory initiatives are underway, as well as independent reviews. The Parliamentary Commission is well placed to consider this wide-ranging programme of regulatory reform holistically and to suggest areas where additional reform is required so that the financial services sector may move forward in making changes and rebuilding its reputation.

4. The sustainability of the UK’s position as the pre-eminent global financial services centre is grounded in the integrity of its financial markets and probity of market participants. Indeed, in measuring UK competitiveness, TheCityUK aggregates Transparency International’s Corruption Perceptions Index alongside other metrics [1] .

5. It is crucial that firms and individuals adhere to the highest standards at all times, not just because this is right in itself, but also because of the impact a reputation for honesty and fair dealing has on the standing of the sector in overseas markets. Poor conduct at any one firm can affect the perception of the whole sector across the country. It is in the interests of banks, the wider financial services community and the UK economy to address this damage as financial services cannot be sustainably successful without confidence and trust.

Implementing change and rebuilding trust

6. Trust in the financial services sector is low following the financial crisis and other failures. Some people question the sector’s value and express concerns over its role. There is no quick fix in rebuilding trust. Achieving sustained, demonstrable change requires long-term partnership between governments, regulators and financial firms.

7. The question of ascribing recent scandals to individual misconduct, misaligned incentives, cultural problems or institutional issues is a complex one. What is certain is that good governance, appropriate incentivisation, and professional standards can foster ethical conduct and long-term value in organisations. There have undoubtedly been failures of management control and the sector is committed to learning the lessons of past mistakes. Those firms needing to change must demonstrate the changes that they have made in recent years and how they will continue to embed them in their organisations.

8. With respect to individual misconduct, breaches of law, regulations and company policy must be dealt with swiftly and with due regard to their seriousness. If an individual's misconduct can be attributed in whole or in part to the culture or the incentive arrangements of their organisation, this must be addressed urgently by boards and shareholders, and changes implemented as necessary. It is incumbent on firms to maintain remuneration policies that incentivise the right behaviours and rule out rewards for failure. The FSA’s strict new regulatory code for remuneration has been designed to ensure this outcome. The regulator also has responsibilities for deterring and sanctioning individual misconduct and it is important for this regime to be robust and well-enforced.

9. Alongside the seriousness of the crisis and of recent failings, it is also important to acknowledge that many organisations, and their thousands of employees, continue to serve their customers in an ethical and conscientious manner.

A vital role in our future prosperity and well-being

10. This Parliamentary Commission matters because financial services matter. The UK’s future prosperity depends on driving growth by investing in innovation and creating new jobs, and maintaining improvements in living standards even as our society ages. A strong financial and professional services sector enjoying confidence and trust is key to these goals. Businesses large and small need financial and professional services to help them to invest and to grow.

Financial intermediation – and in particular the process of maturity transformation, through which short-term deposits are channelled to finance longer-term investment - is essential to the modern economy.

11. The total amount of loans made available by major banks to UK businesses totalled £214.9bn in 2011, including £74.9bn lent to SMEs. Besides bank lending to businesses, financial institutions provide a variety of other services, from alternative types of financing to investment management to risk management. For example:

· UK companies have raised a total of £307bn in issues of shares and private equity since 2005, allowing them to invest in creating jobs, training and developing people.

· Private equity funds managed in the UK currently back around 3,800 companies, employing around 1.2m people across the world, of which 515,000 in the UK.

· The UK general insurance industry in 2010 paid out £60m a day in claims including motor, property, accident and health care.

12. The sector represents a truly country-wide asset: from local high street branches through to the offices and operations of the world’s largest financial institutions. Financial and professional services firms employ just over two million people across the UK directly, more than two-thirds of them outside London, and many more indirectly. There are more than 130 parliamentary constituencies where 3,000 or more people are employed in financial and related professional services.

13. Alongside sectors like advanced manufacturing, pharmaceuticals, digital and creative industries, the financial and professional services sector represents one of the UK’s greatest business assets. For example:

· The London insurance market is the world’s leading international insurance market, enabling businesses to obtain multi-million pound protection for personal, physical, financial and political risk.

· Overseas companies invested £33bn in the UK financial services sector between 2008 and 2010, more Foreign Direct Investment than in any other sector.

· The UK is the leading Western centre for Islamic finance.

14. UK financial and related professional services have a worldwide reputation, from the largest developed economies to emerging markets which are powering global growth. Many third countries look to the UK for help as they seek to develop their financial markets and TheCityUK is working in partnership with a number of jurisdictions, including Moscow, Dubai and Toronto.

15. Financial and related professional services generate approximately 14% of GDP and contributed a £55bn trade surplus in 2011. While the domestic financial sector contributes 5.9% of UK GDP, a further 2.9% of GDP is generated in net exports of financial services, making financial services the biggest contributor to UK’s current account by some margin (see below).

 

The future framework for financial services

16. The ability to take on, manage and intermediate risk is a critical function of banks. While there can be no such thing as an entirely risk-free financial sector, the effective management of risk is at the core of financial services. It is important that financial institutions continue to be able to take well-managed risks. A substantial programme of regulatory reform has been undertaken in the wake of the financial crisis with the aim of improving systemic stability and addressing the causes of the crisis and other inadequacies in the financial regulatory system.

17. The leaders of financial institutions are committed to implementing this programme of reform. The ramifications of misconduct in a sector with fiduciary duties, access to leverage and/or information asymmetries in relation to customers can be grave. While senior executives are ultimately accountable for the conduct of their staff, making this accountability meaningful poses a genuine challenge in organisations as large and varied as modern financial institutions. The effectiveness of governance structures and processes ought to be assessed in the face of this challenge.

18. High standards, including robust and effective regulation, are an asset to the UK’s financial sector. Within the regulatory reform agenda are initiatives covering prudential requirements and financial stability, harmonisation across the European Single Market, supervision, accounting and corporate governance, and consumer protection. Across this matrix are differentiated levels of legislative or policymaking initiative, including international (e.g. G20 Financial Stability Board, Bank for International Settlements’ Basel Committee on Banking Supervision), the European Commission, UK Parliament and regulators. For example, a framework for prudential requirements for banks was set at the international level in the Basel III accords, which are currently being legislated for by the European Union as Capital Requirements Regulation (CRR) and Capital Requirements Directive (CRD), the former which will be directly applicable and the latter which will be transposed into national law by Treasury regulations and FSA Handbook, as provided for under the Financial Services and Markets Act 2000. Appended to this submission is the regulatory landscape produced by TheCityUK in partnership with the City of London Corporation.

19. In particular areas it may indeed be desirable for regulation to be initiated at a national level, though this will not always be the case. In particular, it is vital that new initiatives or legislative solutions take account of the existing reform programme which is already underway at the national, European Union and international level. TheCityUK is currently undertaking research considering the impact of various factors on UK competitiveness in financial services and will share this work with the Parliamentary Commission when it is completed.

20. Much of the regulatory reform agenda is either in the course of being implemented or not yet at the point of implementation, and the Parliamentary Commission should consider how its recommendations work with the grain of this broad-based range of activity.

21. Banking is highly interconnected with other industries within the financial services sector, which in turn is indispensible to individuals and businesses across the UK. Recommendations emanating from the Parliamentary Commission could have far-reaching implications for the banking industry, the wider financial services sector and the economy at large. It is important that any recommendations are well-researched, impact-assessed and targeted at the policy issues they seek to address, avoiding unintended consequences and spill-over effects where possible. TheCityUK would be happy to support the Parliamentary Commission in this regard or to provide further evidence as required.

Appendix

24 August 2012