Banking StandardsWritten evidence from the Financial Services Authority

1. In our previous memoranda to the Commission, the Financial Services Authority set out some of the key conduct issues together with recommendations we believe the Commission could make to enhance the regulatory regime and improve the professional standards and culture within the banking sector.

We have consolidated those recommendations in this memorandum and summarise for the Commission our views on the following:

Strengthening and extending the approved persons regime.

The FCA’s competition powers.

Strengthening and Extending the Approved Persons Regime

2. We believe that although our powers are largely effective, the challenge of improving standards and culture remains. The Commission may wish to consider the following suggestions:

The extension of the limitation period for taking action against approved persons.

A power to prohibit an individual from performing a controlled function on an interim basis.

The extension of the approved persons regime to employees outside the scope.

Our views on the establishment of a professional body.

The extension of the limitation period for taking action against approved persons

3. There is a strong case for reviewing the time limitation period for taking action against approved persons. When taking disciplinary proceedings against an approved person (eg a censure, fine or suspension/limitation), the FSA must commence proceedings within three years of the first day on which it knew of the misconduct.1 Our experience has been that three years is likely to be insufficient time for the FCA to determine whether there is a case to answer in complex investigations, which is often the case when bringing an action against a senior manager of a large firm.

4. By comparison, there is no time limit when we take action for market abuse which applies to any individual and not just to approved persons. In addition, no time limit applies when we are taking disciplinary action against authorised firms. We are aware of the impact that regulatory enforcement action has on individuals and we agree that regulators should progress their investigations efficiently and without undue delay. However, given that senior managers are responsible for the conduct of their firms it is not clear why they should benefit from a limitation period for action particularly when cases are often more difficult to bring against individuals than they are to bring against firms.

5. We therefore urge the Commission to consider recommending the extension of the limitation period for taking disciplinary action against approved persons or alternatively by moving the commencement of the period to a later stage (eg the appointment of investigators).

A power to prohibit an individual from performing a controlled function on an interim basis

6. Currently, when the FSA takes action against an individual on the grounds of a lack of fitness and propriety (ie to withdraw his approval or prohibit him), we have no direct power to remove him from his position until determination of the action against him by the RDC or Upper Tribunal. In complex cases, this can take many years.

7. We urge the Commission to recommend a regulatory power to prohibit an individual on an interim basis from performing functions at an authorised firm (either controlled functions or any functions). This would enable the FCA temporarily to remove incumbent senior managers where they continue to pose a risk to the regulators’ objectives whilst action against them is ongoing. This power would be a significant tool which would allow the regulators to act swiftly to counter any threat to their objectives by an individual remaining in position pending a final determination by the tribunal.

8. We recognise that this power would be a significant extension to our current powers and should only be used in cases where there is strong evidence of a need to remove an individual immediately on the grounds of a lack of fitness and propriety. Appropriate safeguards would need to be established to ensure that the power is properly used, as referred to in points 11–14 in our previous memorandum to the Commission on sanctions and the approved persons regime on 18 January 2013.

Extension of the approved persons regime

9. We urge the Commission to recommend a power to allow regulators the ability to take disciplinary action against employees who are outside the scope of our approved persons regime.

10. We have limited powers against individuals who are not approved. Whilst systems and controls and “tone from the top” are clearly key, it is obvious that a banking sector which functions well for consumers and the economy as a whole cannot be achieved unless employees below the level of senior management also act with honesty and integrity and competence and capability.

11. The current way that our approved persons regime applies to individuals means those approved by the FSA are liable to pay financial penalties for misconduct. Others who might commit the same misconduct but do not require approval because they are performing roles that fall outside of the scope of the regime are not liable. However, it is not necessarily the case that those who are liable are more senior or will fall within the scope of the approved persons regime. For example, whilst a number of relatively junior individuals may be approved to perform the customer function as their role requires them to engage directly with customers, the line management above them may not fall within the scope of the current regime and as such do not need to be approved and are, therefore, not liable.

12. Whilst it is desirable to apply the full regime to senior management and other defined groups where there is a particular risk of significant consumer detriment should misconduct occur, it has until now been considered disproportionate to apply this to all bank employees. However, while the risks arising from conduct by those outside the approved persons group are lesser they are not negligible, and it may be that these could be addressed by a modified approach which included some, but not all, of the components of the approved persons regime.

Professional body

13. A number of respondents to the Commission have proposed the establishment of an independent statutory professional body, or “Banking Standards Board”, as a way of raising standards within the industry. The proposal is that such a body would license individuals working within the industry, and would have powers to take disciplinary action against them, including removing their license, which would amount to a prohibition to work in the industry. In taking over the role of regulation of individuals from regulators, we have some concerns about the establishment of such a body as it would appear to duplicate or overlap with functions that are already provided for in the existing regulatory framework. This could lead to confusion of responsibilities and an increase in regulatory costs.

14. We believe it would be possible to deliver any benefit that might be sought from the establishment of a Banking Standards Board, and to avoid any of the difficulties that might arise, by strengthening and extending the approved persons regime. The possible ways of doing this have been raised briefly in this submission and in more detail in point 21 of our submission of 18 January on sanctions and the approved persons regime. We would welcome any initiative that seeks to raise professional standards within the industry. However, the key will be that any initiative adds value rather than duplicates or overlaps with functions that are already provided for in the existing regulatory framework.

FCA Competition Powers

15. One of the FCA’s new objectives will be to promote effective competition that benefits consumers. This means we will be expected to step in when market features or conduct lead to consumers getting a poor deal. We are now gearing up to deliver on this remit.

16. A toolkit of clearly defined competition powers is required to underpin a fully effective approach. The current approach in the Financial Services Act allows us to use our existing regulatory powers to fulfil the competition objective. We believe that this will give the FCA a strong set of tools. We will also expect to work closely with the OFT and in due course the CMA. However, one aspect of the Financial Services Act 2012 is that it gives the FCA the ability to make a public request to the OFT to consider using its market investigation reference powers rather than being able to refer directly to the Competition Commission. Whilst in practice we will work in co-ordination with the OFT, this may lead to a potential disconnect because resources may not be available to pursue issues raised by the FCA. This could lead to uncertainty and delay in tackling features of market structure that harm competition, and hence in securing better consumer outcomes.

17. We therefore continue to support the recommendation previously put forward by the Joint Committee on the draft Financial Services Bill that the FCA be given market investigation reference powers.

22 February 2013

1 This was increased by the Financial Services Act 2010 from two to three years.

Prepared 19th June 2013