Banking StandardsWritten evidence from Sir Donald Cruickshank

Supplementary Evidence from Don Cruickshank relating to the PRA’s and the FCA’s duties and powers relating to competition.

1. May I first submit as evidence my first report to the Chancellor titled : “Competition and Regulation in Financial Services: Striking the Right Balance”. This is Annex F of my full report of March 2000. It offers an analysis of the difficulty of trading off competition and regulatory, including prudential, objectives which is valid today. It describes the policy framework within which the Financial Services Bill should be written and how the various institutions involved in such decisions should be structured and incentivised.

2. This analysis, applied to today’s proposed legislation, concludes that:

The FCA and PRA should each be responsible for making this trade off. Both should have a primary competition objective in the form “to minimise the anticompetitive effects of requirements placed on authorised persons by the authority.”

The financial services sector should not have any unnecessary exclusion from general competition law. This would require modification of certain clauses in the Bill, mostly to amend surviving clauses from the FSMA, so that behaviour is only excluded from Chapter 1 (agreements between firms where this distorts competition) and Chapter 2 (certain forms of behaviour by dominant companies) prohibitions if it has been properly scrutinised by the FCA and/or the PRA.

The FCA and PRA rules should not be excluded from the scope and scale of complex monopoly investigations by the competition authorities under the Fair Trading Act 1973.

The FCA and PRA rulings should be open to review in respect of their effect on competition. This would be a route via the competition authorities for those who consider themselves to be disadvantaged by FCA or PRA rules.

3 It is recognised that these recommendations lead to complex drafting changes. My overarching recommendation is that the Commission subjects my analysis of 2000 and these recommendations to independent expert legal advice. The question to be posed to such experts would be to define precisely what amendments to the Financial Services Bill would be required to give effect to the principle of seeing the benefits of effective competition given proper weight in the deliberations of the FCA and PRA. Without such amendments, consumers will continue to be ill served, often in the name of achieving spurious or unnecessary regulatory oblectives.

Supplementary evidence from Don Cruickshank relating to exceptional sanctions on firms licensed to provide financial services and their employees.

1. In my first written evidence to the Commission I advanced the argument that the special nature of the financial services sector requires exceptional, even harsh, regulation compared to other sectors of the economy. In oral questioning on 23 October I elaborated as to the penalties that individuals should face if found guilty of egregious behaviour. You have asked me to expand on those thoughts and, by Mr Love, to answer the question: “How to so legislate for the UK without harming the UK’s competitive advantages in international financial markets.

2. My oral reponses were framed in the context of my experience in the US as a member of the audit committee of one of the largest firms in the world, active in all parts of the world, and I proposed something analogous to the US Foreign Corrupt Practices Act.

3. However, may I suggest that that route might well be unhelpful (for the reasons advanced by Mr Love) and that, in fact, the UK already has legislation in place whose structure and penalties might relatively easily be adapted to deal with financial services as a sector. That legislation is the Bribery Act 2010.

4. My recommendation, therefore, is to amend the Financial Services Bill:

The additional clauses would apply to firms licensed to provide financial services in the UK, to all employees of such firms, and to all UK citizens working for similar firms elsewhere in the world.

The key clause would be to subject firms and individuals to civil and criminal penalties for improper performance, defined as being a breach of an expectation of good faith or impartiality or breach of a position of trust.

The test of improper performance would be what a reasonable person in the UK would expect in relation to the provision of the financial service in question.

The penalties for firms would be unlimited fines. The penalties for individuals would be unlimited fines and up to 10 years in jail.

5. I make no apologies for echoing the Bribery Act so precisely, including as to penalties. The reputation of the UK, the strength of its economy, and individual consumers are at least as likely to be harmed by failings in the financial sector as by bribery scandals. Financial services have very unusual characteristics—a judgement about fitness for purpose of a financial product may only be possible some time in the future; quality of service is dependent on the future behaviour of the producer, which may be unrelated to past behaviour; the information on which consumers can base a rational choice may be difficult to understand. So exceptional rules for breach of trust are proportionate.The UK’s bribery laws are similar to those of the US and tougher than elsewhere without undue harm to the country. This might suggest that echoing US sanctions, including jail terms, aimed at rooting out egregious behaviour in financial services markets would not necessarily be harmful. It would bring London and New York together.

31 October 2012

Prepared 19th June 2013