Banking StandardsWritten evidence from Barclays

1. Introduction

1.1. The industry has much work to do to restore trust with customers, shareholders, and the general public. Banks have undergone significant reform since the beginning of the credit crisis, but in certain areas, further change is required.

1.2. Barclays welcomes the establishment of the Parliamentary Commission on Banking Standards and looks forward to engaging with it constructively.

1.3. We note that the Commission intends to report on: a) professional standards and culture in the UK banking sector; and, b) lessons to be learned across a range of areas.

1.4. With this in mind, we have constructed this response to address the key issues set out in the initial questions as part of the Commission’s Call for Evidence. We provide information on the origins of the current crisis, followed by consideration of what has changed, and what still needs to change.

1.5. The document is therefore structured as follows:

Section 2 largely follows the opening questions in the Call for Evidence and aims to address: why professional standards are perceived to have been absent or defective; the experience and impact on the customer; and the causes of the breakdown in trust.

Section 3 focuses on changes already made, underway or proposed, addressing question 6 in the Call for Evidence.

Section 4 sets out proposals for further reform as requested in question 5 in the Call for Evidence. We believe that the Commission can make a significant contribution by proposing reforms on this basis.

2. The UK Banking Industry

Historical context: crisis and change

2.1. To address the Commission’s first question on the extent to which standards in UK banking are either absent or defective, it is important to consider the historical circumstances which inform the current position.

2.2. The economy today is fundamentally different to that of 50 years ago and banking has had to adapt during that period at considerable pace.

2.3. The economy went from being local to global, requiring huge changes in the way in which banks conduct their business and in the capabilities and competence of their staff and leadership. The “Big Bang” of 1986 was not simply about deregulation. It included the professionalisation, computerisation, and globalisation of financial markets that enabled the City of London to earn its status as a primary global financial hub.

2.4. Today, 55% of financial assets managed in the UK are international, compared with 22% in New York.

2.5. The UK has been able to benefit from the private and public sector revenues of this international trade, which has created one of the country’s most significant net exporters with bases across the UK, including Edinburgh, Leeds and Birmingham.

2.6. With the benefit of hindsight, these advantages were delivered alongside systemic flaws which would have a lasting impact. Regulatory oversight and the risk management of some banks proved insufficient to cope with a major collapse in market confidence; and, the taxpayer was exposed to the risk of systemic bank failure.

2.7. As has been analysed in detail by a range of informed commentators, the credit crisis included a catastrophic failure in markets following the build-up, over many years, of unsustainable credit flows at a personal, institutional, and state level, and a fundamental restructuring of the shape of the global economy.

2.8. The credit crisis demonstrated that industry risk management, in some cases, and regulation of the industry in some jurisdictions, had not adapted and kept sufficient pace with the new global order. It was unable to recognise and address the spread of systemic risk across borders and at speed.

2.9. Not all banks required taxpayer rescue during the last crisis. But there is no doubt that the aggregate impact on the economy has been widespread and indiscriminate. Despite significant distinctions in the way different banks fared through the credit crisis, the public’s verdict was clear: banks made mistakes and taxpayers have paid the price.

2.10. The credit crisis exposed the need for significant reform. Much change has already taken place, or is underway, in the way in which banks are governed and regulated. In Appendix B, we provide an outline of change that has occurred or is underway in case it is of use for the Commission. However, broadly the challenge of delivering a safe, sustainable and effective banking sector has two major aspects:

First, banks must be resilient, in order to greatly reduce the probability of failure in the event of a future crisis. Significant reform has already been undertaken in this area: banks are considerably better capitalised; they hold much bigger, and higher quality, liquidity buffers; have reduced leverage ratios; supervision and prudential regulation is being strengthened (with the UK playing a lead role in international negotiations as well as through unilateral action); and the wholesale markets in which banks operate are becoming more transparent and better regulated. The result is that banks are much less likely to fail than they were pre-crisis. Further reforms are still in the process of being finalised and implemented that will make that likelihood even lower.

Second, banks must be resolvable, so that in the event that they do fail, they can do so without recourse to taxpayer funds and with minimal systemic impact. An end to “too-big-to-fail” will only be achieved when banks are truly resolvable. Whilst there is still some way to go, a combination of the Independent Commission on Banking’s recommendations in the Banking Reform Bill, alongside the European Recovery and Resolution Directive proposals, and steps some banks have been taking themselves through work with the international colleges of local regulators to develop recovery and resolution plans, will mean that resolvability will, and must, be achieved in the near future.

2.11. Measures to improve resilience and resolvability are clearly vital to ensure that any future crisis does not impact the domestic and global economy.

2.12. It is also clear, however, that public trust in banks has not eroded as a result of the credit crisis alone. A number of additional factors, ranging from mis-selling issues to concerns about transparency in the way some products have been sold, have further undermined trust.

2.13. Customers have been let down, and that must not happen again.

2.14. Additional reforms required to address many of these issues are underway, including changes to the nature of regulation in the UK through the creation of the Financial Conduct Authority (FCA) and its more assertive approach to the regulation of conduct matters. We hope Parliament will continue to monitor the effectiveness of these new structures as they evolve.

2.15. However, the Commission is rightly asking whether or not these in-flight, planned, and expected reforms are sufficient to address the underlying issues.

Consumer Experience and Impact

2.16. Customer demands have changed materially in the last decades. The percentage of customers in Great Britain with a current account has gone from 75% in 1992 to 97% in 2012, with the vast majority of the population banked.1

2.17. Access to banking services is now 24/7 with phone, internet, and mobile banking all advancing significantly. Call centres and internet banking represent a leap forward and a revolution in convenience in retail banking, and UK banks are among the leaders in the world in their provision of these services—both in terms of the pace of their adoption and the quality of the service delivered. UK bank customers in 2012 expect to be able to access cash at ATMs or use their credit and debit cards worldwide. They expect online banking 24/7, and have access to products which are unavailable in many other jurisdictions (eg, offset mortgages).

2.18. Similarly, consumers’ requirements are now far broader and more complex than they were even a few decades ago. For example, as the number of individuals that enjoy the safety of a defined benefit pension has reduced, so the importance of savings has increased. As people are required to take greater care planning for their retirement, a number of different and increasingly complex products are required. Banks and financial services companies have innovated and developed new products to meet these changing customer needs. There remains a significant gap in the market for the provision of these services that will not be filled unless banks and other providers are able to innovate.

2.19. As considered above and as highlighted in Appendix B, there has been considerable reform of banks since the onset of the credit crisis. Whilst there were some obvious flaws in banks’ resilience and resolvability, we do not believe that “principles based” regulation meant that banks had a free hand to do as they pleased pre-crisis. Even before the credit crisis, the banking industry was one of the most heavily regulated sectors subject to complex international agreements (negotiated and monitored by the Basel Committee on Banking Supervision) and detailed local rules (for UK banks, European Directives are enacted into UK law via the FSA Handbook).

2.20. Importantly, the sector has never been regulated on a purely principles based approach. It would be more accurate to think of the system as “principles plus rules”, reflecting the need for regulation to avoid providing a menu of prohibited activities which can be avoided with “clever” legal support. The Commission will be aware that the US had a largely rules based approach, and is broadly recognised as the site of the birth of the credit crisis.

2.21. For business customers and wholesale markets, the increase in complexity has been even more pronounced, largely as a result of the need for clients to operate effectively in highly globalised and specialist markets. Investors’ demand for “alpha”, or risk-adjusted returns, is another reason for increasing complexity in financial services products.

2.22. Additionally, as Lord Turner noted in a recent speech, the UK’s almost unique model where current accounts are offered below cost of production through “free-if-in-credit” banking, may have unintended consequences:

“one important barrier to competitive entry into UK personal sector banking is obvious—the fact that the core product, the current account, is usually given away for free, sold at below cost of production. Which means that it may be difficult for a new entrant to make a business plan stack up unless they assume the sale in some future year of high margin ancillary products—products which if we are not careful may be for both the incumbents and the new entrants, the next PPI.”

2.23. Millions of customers benefit from, and value, free-if-in-credit current accounts, and so any move away from the current model will need careful consideration. What is important is that consumers have choice and customers of Barclays can choose from a range of basic, fee paying, specialist (eg, student and youth accounts) or “standard” current accounts.

2.24. As banks have innovated to develop products to meet the more complex needs of customers with increasingly sophisticated financial requirements, issues have arisen as products, designed to meet the needs of certain customers were sold, in some cases, too broadly.

A Crisis of Trust

2.25. The historical context outlined above is important in understanding where banking stands today in terms of public perception and trust. The credit crisis and some high profile cases have created the perception that banks have adopted inappropriate risk appetites and that product sales, rather than customer service, are the drivers of bank incentive structures.

2.26. Some commentators have suggested that, as well as contributing to this trust deficit, market instability, mis-selling, and other failings are symptoms of fundamental weaknesses in the standards, values, and culture of banking.

2.27. This is a serious suggestion that must give the banking industry pause. It is important that the industry acknowledges and repairs areas where flaws in the norms and standards to which the industry operates have been exposed.

2.28. But to achieve the effective change, it is important to think precisely and clearly about the extent and nature of these flaws, and avoid generalised policy drawn from individual market failures.

2.29. If separate market failures are shown to have their own precipitate causes, they must be dealt with forensically, and separately. These issues are too important to be met by broad brush responses.

2.30. For example, some commentators see recent events as strengthening the argument for a return to Glass-Steagall style full separation of banking services, arguing that the structure of banks was responsible for many of the perceived failings in the sector. Indeed, Glass-Steagall did not protect US banks from a range of failures through the 20th Century and into the 21st.

2.31. In virtually every case, there is no apparent evidence to suggest that structure alone has had any, let alone any material, influence on the failings. Consequently, there is no evidence that splitting banks would have any beneficial impact on the probability of such events occurring again in the future.

2.32. It has also been argued that institutions that are combined are “too-big-to-manage”, however, a wide range of institution types have been involved in the various issues affecting industry trust. Building societies for example were also involved in issues connected with PPI.

2.33. Many have used recent events to reassert calls for reform related to “too-big-to-fail.” However, this issue has been extensively reviewed in the years since the financial crisis, not least by the Independent Commission on Banking. In fact, as has been well documented elsewhere, and was acknowledged by the Commission, universal banks were neither the cause of, nor were they disproportionately affected by, financial instability.

2.34. In fact, universal banking models were materially more likely to have survived the banking crisis than monoline peers.

2.35. However, as stated in paragraph 2.10 above, it is clear that business models must not prevent a bank from being resolvable. This is subject to considerable policy attention from the Banking Reform White Paper in the UK, to the Liikanen group and the Recovery and Resolution Directive in the EU, through to the international work of the Financial Stability Board on this issue.

2.36. There is no evidence that examples of mis-selling and other failings point to some kind of “infection” of retail culture by the presence and proximity of wholesale and investment banking. There have been regrettable issues that have arisen in all parts of banking.

2.37. Cultural differences can and do exist across business lines. Trying to achieve homogeneity is unwelcome, and likely to be unachievable. The outcome must be to create, within any particular organisation and across the industry, a minimum, consistent basis of expected behaviour across the relevant circumstances—be they geographic or business-specific.

2.38. Just as culture in different parts of banking can be different, so too can it evolve and change. Whilst recognising some inevitable differences, firms should ensure that appropriate values prevail and consistency of expected behaviour is achieved to the highest possible degree of frequency. It is partly to ensure this is the case that Barclays has commissioned Anthony Salz to lead an independent review.

2.39. It appears to us that the principal questions for the Commission in this regard relate to defining what that foundation standard should be comprised of, and how best to ensure that it is practiced day-in-and-day-out in particular organisations.

2.40. For both industry and individual institutions, leading by example plays an important part in ensuring a strong expectation of acceptable behaviour is prevalent. Having the right governance and reward structures to reinforce those expectations is equally crucial. Indeed, visibility of these standards may offer a competitive advantage.

2.41. We believe it is fundamentally important that banks—as with all organisations—demonstrate through what they do and how they manage their operations the positive impact that they have on society. It is vital for employees to understand and feel proud of that contribution as part of reinforcing the principal purpose and objective of the organisation.

3. Reforming the Industry: Maintaining Momentum on Change Underway

3.1. There are already signs of change in the way in which some banks operate:

For example, past mis-selling in PPI and Interest Rates Swaps is being dealt with through a comprehensive programme of redress. Barclays is committed to compensating customers, where mis-selling is proven to have occurred, and to identifying other instances where this may have taken place.

The vigour with which Barclays responded to and cooperated with the authorities when the problems with LIBOR emerged are a better signal of Barclays culture today than the, now historic, incidents that arose in the first place. In particular, Barclays has:

cooperated to an “extraordinary” degree with the investigating authorities and was the first institution to settle;

independently undertaken significant legal investigation, spending over £100 million and reviewing 22 million documents to ensure we rooted out the inappropriate conduct;

vigorously and thoroughly conducted a review of employee conduct including taking appropriate disciplinary action;

established strengthened systems and controls around rate submissions; and

established an independent review of our business practices led by Anthony Salz.

Changes in approach and incentives for our customer-facing retail staff:

We have been evolving our pay structures over recent years so that today, of our front line staff’s incentive pay, over half is based on customer satisfaction.

Our retail incentives are structured so that the value of any product has no impact on the level of reward received, so for example there is no incentive to turn a £5,000 loan into a £10,000 one.

There are strict rules in the incentives plans concerning sales practice and conduct. For example, if a colleague is found to have mis-sold a product, they will lose all incentive payments for the performance period.

We regularly review our incentive plans, which are subject to robust governance oversight to make sure they are operating appropriately.

Barclays has taken significant steps to re-focus on our customers. We have invested in branches and developed new, innovative products aimed at increasing customer convenience. We are ranked first in the UK for customer service amongst high street banks (JD Power UK Retail), and currently have record 80% customer satisfaction for Barclaycard in the UK and ranked 1st in the US (JD Power UK Retail).

The structure of Barclays remuneration policy, more generally, has undergone significant reform since the beginning of the credit crisis. This includes enhancements in the alignment between remuneration and risk. For senior roles, a significant proportion of variable remuneration is delivered in the form of deferred bonuses and long term incentive awards, which help ensure sustained performance over the longer term.

3.2. This action is the least that our stakeholders expect. Changes made so far, within individual banks and at an industry and regulatory level, have been significant and wide-ranging. However, we believe that there remain areas where coordinated action by industry and policy makers would be welcome.

3.3. One way in which banks ensure that there is an outlet for employees to raise concerns, and where they do not feel able to do so via line management, is whistle blowing. Whistle blowing arrangements have operated for many years and are frequently subject to internal and external audit. Barclays policy on whistle blowing allows all employees to report concerns in good faith without fear of reprisal or any other detrimental or discriminatory action taken against them, and provides the means, including dedicated hotlines, for this to happen.

3.4. But there are always improvements that can be made to this type of process. Barclays is presently reviewing its whistle blowing arrangements, including whether outsourcing the operation of the Whistle blowing hotline would improve its effectiveness and the number and quality of concerns that employees raise. Evidence demonstrating that employees are deterred from raising concerns because the hotline is operated internally is hard to come by. What is more important is ensuring an environment and culture that is intolerant of unethical practices, so that any issues are escalated immediately.

4. Specific Recommendations: an “Action Plan” for the Industry

Regulatory reform: a final hurdle

4.1. Much change has been secured since the credit crisis and there are significant reforms underway. There are many within the industry, working alongside the authorities, that are focused on enabling this change, especially those changes required to eradicate “too big to fail.” The challenge will then be for industry to prove to supervisors and the markets that resolution is a reality and for sovereign states to communicate clearly that taxpayer finances will not be needed—and will not be provided—again.

Culture and Behaviour: Professional Code of Conduct

4.2. Within any large organisation, there is a risk that individuals will take inappropriate decisions. Safeguards and structures must be put in place to minimise the risk of this happening whist at the same time maximising the likelihood of early detection, corrective action and deterrent.

4.3. We believe that a major step that could be taken to improve professional standards in banking would be to make it literally more “professional.”

4.4. In Appendix A we propose a significant new approach—a professional code of conduct that could be set within the framework of a new Chartered Institute of Bankers and Register of Approved Bankers.

A code of conduct

4.5. We need to ensure that the high professional standards that the vast majority of bank employees adhere to are followed by all employees. This could be done through the development of a more rigorously enforced code of conduct for banks backed up by a register of banking professionals.

4.6. The “Code of Conduct” and the “Register” could be operated in full cooperation with the FCA and, where necessary, building on and broadening the FSA/FCA’s existing authorisation programmes which include the Approved Persons Regime, Significant Influence Function process, and requirements for front line staff to be appropriately trained and monitored. Where existing authorisation focuses on a particular specialism or senior executives, we see scope for the development of a far broader framework. We would welcome further consideration as to whether this could be achieved through the extension of current FSA schemes; the scope and scale of change required would probably be material and extensive.

4.7. Barclays staff who provide products to retail customers are currently required to be accredited through our Training and Competence Schemes, which are driven by regulatory requirements and our own standards of best practice. Our regulators require proper procedures for training, competence and monitoring to be in place for these staff, and ask to review the Scheme on a regular basis.

4.8. This principle of membership of an accredited Training and Competence Scheme could be developed to become an aspect of the proposed Register of Bankers.

4.9. We believe therefore that bank employees should be expected to train and qualify for accreditation and registration with a foundation of core banking skills and knowledge and that individuals should be subject to standards for continuing education over time, potentially including annual quota.

4.10. This would have to be supplemented significantly with further training—as is currently the case—so that specialists are appropriately able to carry out their particular functions.

Disciplinary procedures

4.11. The proposals would ensure that any serious misdemeanours by bank employees would be captured by the FCA/or another body and recorded on a register (potentially held by a Chartered Institute of Bankers). Future employers would be able to check the record. There would also need to be the possibility of being “struck off” the register altogether and, therefore, unable to be employed either in certain roles or the industry in general.

4.12. The process of continuous education and training would require individuals to maintain the requisite skills, knowledge, and (importantly) principles to be officially accredited to work in the industry and in certain roles.

A new professional body for bankers

4.13. A newly established and independent professional body, with an enhanced foundation of training and accreditation, plus a robust system for detection and correction of misdemeanours would ensure that a high level of professional standards would be required right across the industry.

4.14. Customers would be able to confirm that a person was a member of the Register, as with other professions, and would have recourse to make a complaint to the governing body in the event that they are concerned with the conduct of that person.

4.15. We hope that this body could evolve into a centre for excellence, best practice and the further development of an informal expectation of conduct and behaviours to complement the new Code of Conduct.

Remuneration

4.16. The structure of remuneration for senior management and for front line staff has fundamentally changed post-crisis. This includes:

Enhancements in the alignment between remuneration and risk.

For senior roles, a significant proportion of variable remuneration is delivered in the form of deferred bonuses and long term incentive awards, including a significant proportion in the form of Barclays shares.

Clawback provisions apply to deferred bonuses and long term incentive awards, which help to ensure sustained performance over the longer term.

4.17. Whilst much has been achieved in the structure of the way banks pay, there is more to do to provide an appropriate balance in distributions between staff and other stakeholders, especially shareholders. We recognise the views of many commentators who believe further progress in bringing down the quantum of pay for banks in general, and for specific roles, is needed.

4.18. That journey will take time but Barclays took important steps in that direction in 2011:

Bonuses for our Executive Directors and eight highest paid senior executive officers were down 48% versus 2010 on a like-for-like basis and were deferred over three years.

Total incentive awards for 2011 were down 26% versus 2010, against 2% reduction in adjusted profit before tax.

Cash bonuses in the investment bank were capped at £65,000.

The proportion of the bonus pool that was deferred significantly exceeded the FSA Remuneration Code’s requirements and is expected to be one of the highest deferral levels globally. Some 75% of the bonus pool in the investment bank was deferred.

4.19. In 2011, as in every year, Barclays judgements on pay were designed to carefully balance overall commercial performance with the need to demonstrate responsibility to shareholders; to be sensitive to the environment; and to remain competitive by retaining the best talent to serve customers.

4.20. We believe those recent steps show a determination to achieve the right balance. However, this must receive an industry-wide focus.

4.21. It is also crucial that the nature of any incentives provided to staff accurately and materially reinforce the appropriate values, especially customer and client focus.

4.22. Staff can, should be, and are trained, encouraged, and incentivised to match the right products for customers’ needs responsibly, transparently, and at the right price. This should be maintained as the economy recovers.

Market Structure

4.23. Banks must focus on customers. The UK banking industry is the envy of the world in the eyes of competitors, but it is clear that many customers and much of the public do not share this view as a result of a fundamental breakdown in trust.

4.24. The industry must take responsibility for addressing this breakdown in trust, both by making sure it behaves in a way that puts the need of customers first, within an appropriate risk framework.

4.25. It will take a long time to remediate that gap, but we believe that by demonstrating explicitly that it is focusing on delivering excellent services and products for customers, the industry can restore trust.

4.26. The Committee may wish to consider the implications of Lord Turner’s speech on the charging structure of UK current accounts. Free-if-in-credit banking is popular with customers, but banking is not free and banks must make a return for shareholders. The current model may not offer the best way to reconcile those differences and we would welcome a considered debate on the options for change.

Customer expectations

4.27. In the meantime, there must be sharp focus in the industry on regaining trust through excellent customer service with products that are innovative, respond to customer needs, and are transparently priced. At Barclays, we are focussed on understanding customers’ needs and matching those to the right products and services to make their lives much easier.

4.28. Over the past six months we have delivered a significant number of measures designed to do exactly that. The industry leading Barclays Mobile Banking and Barclays Pingit “apps” have revolutionised the payments landscape allowing customers to send and receive money wherever they are; and our new Current Account Features Store also allows customers to choose the products and services they want easily and quickly. Almost 90% of Barclays customers are now within 10 miles or less of a branch equipped with a free and instant replacement debit card machine. Barclays will always continue to look for innovative solutions to enhance our customers’ experience.

4.29. Lasting relationships with customers are imperative to our success and so ensuring that all of our customers are presented with product choices that meet their needs and that they can easily understand is better for the customer and for our business in the long term. With this in mind, we are committed to the Government’s “Simple Financial Products” initiative and it is our intention now to lead the industry in reaching the right conclusions for all of our customers. There is still plenty of work to be done in defining, and reaching a consensus on, a consumer segment that simple products are targeted at. It will also be important to ensure that products are commercially viable and guided by industry-wide principles and consistent definitions that allow room to differentiate in the interests of the consumer and competition. Barclays looks forward to working closely both with the Sergeant Review team and Government over the coming months to turn the interim report into tangible outcomes for consumers.

4.30. Banks have a clear role in providing credit, particularly to individuals and small and medium sized businesses. However, financial markets have changed considerably in the last few decades. Financial innovation has allowed wider access to financial markets and diversification of funding sources. Investment banks have played a key role as intermediaries, channelling and allocating resources to support business growth.

4.31. Unlike in the US, where only 10% of US corporate borrowing is accessed via banks, access to funding through capital markets by European businesses is still in its infancy, with 70% of them financing themselves with debt. As the EU banking sector continues to deleverage, it remains important that alternative sources to funding are available for businesses. In this context it is important that the new regulatory regime provides an appropriate framework that does not hinder the ability of corporates to seek finance.

4.32. Whilst the needs are more complex than for retail customers and small businesses, banks must equally compete to provide an excellent service to corporate clients, providing the products, infrastructure and support network that clients need across all our business segments. As an example, the Barclays Investment Bank e-commerce platform, BARX, is a leading global provider of electronic transaction solutions for institutional investors, financial institutions and corporations.

4.33. Platforms such as BARX continually evolve to target client needs as we develop new services to ensure that clients are able to adapt to regulatory changes (eg, providing Central Clearing services).

4.34. However, the light that has recently been shed on past failings in the industry has illustrated the need for renewed efforts to ensure market integrity, in particular for end users. Barclays Investment Bank is undertaking a wide ranging internal review which will support the work being undertaken by Anthony Salz and will include a review of all business lines and our business conduct.

5. Conclusion

5.1. While important aspects of the changes highlighted here have already taken place, or are underway, we need to accelerate the pace of change and go further so that the UK can have an internationally recognised, robust and professional banking industry.

APPENDIX A:

PROPOSAL FOR A CHARTERED INSTITUTE OF BANKERS AND A REGISTER OF APPROVED BANKERS

A.1.Barclays would welcome serious consideration by the Commission of a single “Chartered Institute of Bankers” to promote and develop professional standards across the industry, and to administer a new professional register which all staff who work within certain functions are required to sign, and from which they can be “struck off” in the event that they fail to maintain the required standards.

A.2.The current framework with the FSA, such as the Approved Persons Regime or the Training and Competence Regime, may well form a useful foundation, that could be strengthened and broadened.

A.3We believe that this approach would address four deeply significant areas:

First, it would provide a formal central UK register of bankers, providing certainty and confidence to customers that they are being served by qualified and trustworthy professionals who are bound by a code of conduct and are individually “licensed.”

Second, it would provide an enhanced process and means for the FCA, working with the Institute, to identify and discipline staff who fail to live up to the high standards customers expect. The combined efforts of the FCA and the register could ensure that staff guilty of serious malpractice could not continue to operate in the UK.

Third, the Institute could provide in parallel a forum for developing cultural renewal and the restoration of trust and confidence across the industry.

Fourth, the Institute could become the sole basis for the development of targeted professional qualifications for banking activities consolidating, or working with, the existing professional bodies (eg, CISI, CFA, Chartered Banker Institute) to develop industry wide technical qualifications as well as standards for ethics, behaviour and leadership. We would prefer a single—and more transparent—source for such standards and a broader framework than the current FSA Approved Persons Regime.

A.4.In detail—the challenge
Modern banking is characterised by considerable complexity, with highly qualified professionals undertaking specialised and diverse roles. This diversity and specialisation means that a single specific technical banking qualification could not offer banks’ stakeholders the necessary confidence—it would simply not be good enough. For example, being a highly qualified small business relationship manager would require a set of very different skills and expertise from an investment banker (and even within that broad base, a trader will require different skills and expertise than an advisor), or a trader in government bonds. The trend towards fragmenting technical specialism has been under way in both retail and wholesale banks for many decades, and is a prime driver in why traditional “banking exams” are no longer treated as a requisite in retail banking. As a result, a bewildering array of separate qualifications and associated professional bodies has evolved, each providing aspects of an individual “licence to operate” and in some cases with sophisticated codes of practice and the ability to suspend or discipline errant members.

A.5.However, there are clearly fundamental standards of behaviour alongside some foundations of financial knowledge which underpin all aspects of banking—retail and wholesale—alongside the need to be properly skilled to undertake each specific role. Recent attempts to codify common standards across the industry (notably via the Chartered Banker: Professional Standards Board for the UK, of which Barclays is a founding member), are in their infancy, but it could form the basis for a new movement. Whether or not that is possible requires a much clearer articulation of the standards to which such a body must adhere.

A.6.We believe, therefore, that the industry requires a code of conduct formalising these standards, with proper disciplinary procedures underpinning it, both within each bank and across banking as an industry. Similar professional safeguards exist in many other industries and professional fields, providing assurance and suitable barriers to entry for unqualified or unsuitable staff.

A.7.In detail—proposal for the Commission
Barclays asks the Commission to consider recommending the establishment of a new Chartered Institute of Bankers and the establishment of a register of approved bankers and roles. This could be housed within an existing body, but it must be clear what is required of that body to meet the expectations of the Commission.

A.8.We believe that this body should take the following form:

It should be funded by industry subscription, but be governed with full charitable status to guarantee its independence and transparency.

Its role must not include advocacy on behalf of the industry.

It should propose and manage a set of Rules and Standards required of professionals generally and in specific roles within banks in conjunction with the FCA. The Rules and Standards should require professionals to meet serious criteria for knowledge, skills and conduct as well as demonstrating appropriate skill to undertake their specific role and to maintain those standards over time through continuous learning initiatives and quotas.

It should operate a Register of Approved Bankers and Roles, which is reinforced by a disciplinary process. If a professional is found by the FCA or any other regulatory body to have failed to meet the Rules and Standards, they should be subject to appropriate disciplinary procedures, which should include being removed from the list and therefore prevented from undertaking such a role in the future at any UK bank. The register should be made available to the public in a similar manner to other professions.

It should have a responsibility to make available to the Regulator at regular intervals data about complaints against individuals and vice versa. In the event that disciplinary action is taken against a professional, the Regulator should be informed and given the opportunity to comment. Where appropriate, processes should allow complaints and issues to be managed across multiple bodies simultaneously (eg, where a banker has transgressed rules of another professional body such as CISI).

It should take a lead in developing industry standards for learning and leadership development across the industry, working with the existing training providers and specialist professional accreditation bodies.

It should provide a forum with a view to further developing best practice, ideas and standards to improve the banking profession. By providing such a forum, Barclays hopes that an enhanced sense of professional pride in the ethical, professional and fiduciary responsibilities inherent in banking will be achieved. The body could also help drive the “right kinds of innovation” commensurate with the public interest.

A.9.We invite the Commission to consider these suggestions.

APPENDIX B:

REGULATORY DEVELOPMENTS SINCE THE CRISIS

B.1.Banks remain subject to unprecedented regulatory change following the financial crisis and subsequent regulatory failings. Banks also continue to experience the effects of the new intensive and intrusive approach to supervision.

B.2.There are major changes in prospect in relation to business conduct that banks will be required to implement alongside the prudential reforms set out below. These include the revision of the MIFID and Market Abuse Directives, further consumer focused EU legislation and, within the UK, the implementation of product intervention, the Retail Distribution Review and the Mortgage Market Review.

B.3.Key prudential reforms include:

International Regulatory Structure: the global regulatory infrastructure has been renewed and energised, with the Financial Stability Board given responsibility for delivering the G20 regulatory reform programme and acquiring an oversight role over global standards setters, over the quality of implementation of global standards through peer review. The FSB has notably developed Principles for sound practices in relation to remuneration, systemically significant financial institutions, and the recovery and resolution of failed institutions. The Basel Committee on Banking Supervision and the International Organisation of Securities Commissions and other global standard setters have also been reformed.

European Regulatory Structure: the EU has established three sector focused supervisory authorities, including the European Banking Authority and the European Securities Markets Authority that will have responsibility for developing a common EU rulebook and for oversight and quality assurance of the activities of EU supervisory authorities. A European Systemic Risk Board has been established to maintain system-wide surveillance of financial stability and threats to it.

National Regulatory Structure: the UK—and other jurisdictions—are enhancing their approach to banking supervision. In the UK this has involved the development of a Twin Peaks approach, with prudential supervision being given to the Prudential Regulation Authority under the Bank of England, and market and conduct supervision being the responsibility of the FCA. A Financial Policy Committee is being established in the Bank of England to take a macro-prudential view of financial stability. The overarching theme is that supervision should be more intensive, more intrusive, more judgement based and more driven by the big issues than by detailed rules. The new regime should be fully operational early in 2013. In advance of this, the FSA has implemented a more intrusive approach to supervision in relation both to business conduct and prudential issues, including the oversight of corporate governance, with greater scrutiny of candidates for governance positions including a formal assessment of their competence.

Capital and liquidity: There have been substantial increases in these requirements under Basel III and CRR and CRD IV—with a minimum 4% Core Tier 1 requirement, supplemented by a 2.5% capital conservation buffer and, further surcharge on large and complex organisations (a “G-SIB” buffer described further below)—bringing expected minimum Core Tier 1 capital to c. 9.5% (before potential application of a countercyclical capital buffer of up to 2.5%). Basel III also introduces a non risk-adjusted leverage ratio and places greater emphasis on stress testing. For the first time globally applicable quantitative liquidity standards are being introduced in the form of a Liquidity Coverage Ratio (LCR) and a Net Stable Funding Ratio (NSFR). Transition to the new regime is scheduled to begin on 1 January 2013, with full implementation on 1 January 2019 (although the UK has already implemented a more stringent version of the Basel LCR—see further below). More recently, the Basel Committee on Banking Stability (BCBS) has commenced a fundamental review of capital requirements for instruments held in the trading book, which will result in significant further changes to the prudential bank capital framework.

The UK is at the forefront of acting upon and indeed anticipating many of these changes, whether through an enhanced stress testing and an interim capital regime focused on Core Tier 1 or through the application of capital planning buffers on top of its basic requirements based on stress testing results. In addition, the Interim Financial Policy Committee has recommended that the FSA encourage UK banks to develop capital buffers if need be in excess of those implied by the need to transition to Basel III. The UK also anticipated the Basel liquidity requirements with a new UK liquidity regime that was implemented through 2010. It is therefore possible that the UK will seek to speed up the pace of transition for UK banks and/or set requirements that are higher than the globally agreed minimum.

Systemically Important Institutions: The FSB has developed a set of policy measures to address the risks from systemically important financial institutions (SIFIs). These build on the methodology and additional capital buffer requirements developed by the Basel Committee for globally systemic banks—which envisage buffers of up to 3% of additional Tier 1 capital. The FSB published the names of an initial group of 29 global SIFIs, including Barclays, which will be updated annually. Basel has recently consulted on extending this sort of approach to domestic systemically important banks. Core supervisory colleges have been established for more than 30 large complex financial institutions under the aegis of the FSB. Basel, IOSCO and the EU have each issued principles on cross-border supervisory co-operation with a particular emphasis on the role of colleges. EU banks also have EU supervisory colleges (which are separate from the global supervisory colleges operating under the aegis of the FSB) and which have responsibility for certain activities in relation to capital adequacy models recognition and overall capital requirements under the Capital Requirements Directive.

Crisis management: As noted above, international regulators, led by the FSB are developing global standards for crisis management and resolution. The FSB has issued the Key Attributes of Effective Resolution Regimes for Financial Institutions. This sets out the responsibilities, instruments and powers that national resolution regimes should have to resolve a failing systemically important financial institution (SIFI); it also sets out requirements for resolvability assessments and recovery and resolution planning for global SIFIs. This includes the preparation of Recovery and Resolution Plans by individual institutions and the planned introduction of measures aimed at further enhancing loss absorbing capacity, including through the introduction of a “bail-in” regime impacting certain bank creditors. Crisis Management Groups have been formed under the aegis of the FSB for all major international financial groups. These will oversee the preparation of Recovery and Resolution Plans for these groups. A number of countries, including the UK, have put in place a statutory regime (under the UK Banking Act) with a set of tools to enable an orderly resolution of a failed institution to take place pre-insolvency. The EU has proposed a Recovery and Resolution Directive that will mandate both recovery and resolution planning and establish more effective resolution tools and procedures throughout the EU.

Deposit guarantee schemes: The UK and EU have significantly reinforced levels of deposit protection, with the elimination of coinsurance and the raising of the level of cover from £35,000 to £85,000. Banks have also had to develop Single Customer View systems in order to allow the accelerated payment of compensation to depositors in failed banks. An EU Directive is likely to extend coverage to all non-financial corporates and will require the establishment of prefunded schemes financed by industry.

Remuneration: the UK developed the Remuneration Code to implement FSB principles on Remuneration for the 2009 payround. This was subsequently reinforced following the implementation of CRD III in time for the 2010 payround.

Conduct of business regulation: The FCA will build upon customer-focused initiatives undertaken in recent years. A key element of this will be a more interventionist approach with the regulator seeking to identify emerging threats of customer detriment at an earlier stage as opposed to simply ensuring customer redress after the event. The FSA has developed a strategy in relation to product intervention. The EU is in the process of revising its Market Abuse Directive and the Markets in Financial Instruments Directive. The latter, in addition to enhancing investor protection, introduces important changes to market structures and practices and will implement a number of the G20 requirements in relation to the trading of derivatives. The EU has also passed a European Market Infrastructure Regulation (EMIR) to cover “over the counter” (OTC) derivatives, central counterparties and trade repositories.

Retail Distribution Review: the implementation of higher minimum qualification standards for retail investment advisers, including bank advisers, by the end of 2012 will underpin greater professionalism across the investment advice sector. New adviser charging requirements will see a fundamental change in how remuneration is set for financial advisers. The level of remuneration will, in future, be agreed between the customer and their adviser, rather than set by product providers by way of commission as is often the case now.

Macroprudential regulation: the UK is establishing a Financial Policy Committee within the Bank of England with responsibility for deploying macroprudential limits on the banking system and monitoring risk within the financial system as a whole. The Bank of England has made known the tools that it wishes to have. These mainly focus on increasing capital requirements and will be delivered through secondary legislation associated with the Financial Services Bill currently going through Parliament. At an EU level, the European Systemic Risk Board will also assess system-wide risk in a way which ties in with enhanced oversight envisaged under the EU’s reform of its supervisory structure.

Corporate Governance: In October 2010, Basel issued a set of principles for enhancing corporate governance in banks. These cover: the role of the board and its qualifications; the importance of a risk management function (including a chief risk officer for large and internationally active banks), a compliance function and an internal audit function, each with sufficient authority, stature, independence, resources and access to the board; the need to manage risks on a firm-wide and individual entity basis; and the board’s active oversight compensation. The EU issued a Green Paper on Corporate Governance, covering the role of the Board, the role of the risk management function, the role of external auditor, the role of the supervisor in relation to the Board, the role of shareholders and remuneration. The Walker Review covered similar territory in the UK. The FRC reviewed the Corporate Governance Code and developed the UK Stewardship Code. As noted, the FSA has reinforced its supervision of governance, and tightened its expectations of the risk management function, including expectations of Board-level risk committees and chief risk officers. It has also begun to assess formally the competency of candidates for senior management positions, as well as their probity and financial soundness. The FSA has also (jointly with the FRC) increased expectations of the auditor in the supervisory process in the light of its disappointment with some aspects of the performance of auditors during the financial crisis.

Other regulatory reforms: there are other significant changes which relate to credit rating agencies, hedge funds, securities markets and other aspects of governance, including accounting and auditing.

B.4.These changes have changed, and will continue to affect substantially, the environment in which banks operate and the incentive structures implicit to their business and reward structures. The very substantial changes to the capital and liquidity regimes alter fundamentally the economics of different lines of business. The crisis management measures change substantially the paradigm in which banks operate and make it entirely clear to shareholders, senior creditors and management that no bank will be viewed as being too important to fail and in the process ensure that financial stability, regulatory compliance and fiduciary duty is central to the Board decision-making process. The need for more intrusive supervision is widely recognised and in the UK we are giving the regulators additional macroprudential tools and the means of ensuring that separate attention is given to prudential supervision and conduct of business considerations. This has been backed up by corporate governance and risk management changes and other market infrastructure and regulatory reforms intended to reduce the prospect of systemic risk.

28 August 2012

1 GfK NOP Financial Research Survey (FRS) 12 months ending June 1992/2012, 69,628/59,424 adults interviewed respectively.

Prepared 19th June 2013