Banking StandardsWritten evidence from Mr Rippon

Section A

Bullet summary

A.1 There is a very large number of prudential and integrity concerns about banks that need to be followed up. Some are listed in B.1 below.

A.2 Concerns about imprudence and lack of integrity by banks, and concerns about the performance of regulators, require more statutory changes that are in the current Financial Services Bill and probably than are contemplated for the Banking Reform Bill; administrative action within the current and proposed legislative frameworks is not enough.

A.3 The statute needs more detailed and demanding authorisation criteria/Threshold Conditions for banks, including on the integrity and the fit and proper criteria. Having more rigorous criteria on the face of the primary statute should help in the restoration of the UK’s reputation and help to deliver more effective regulation.

A.4 The regulators should be required to report at least annually on their interpretation and application of the authorisation criteria, and on the principles that guide the regulators in the exercise of their powers, having regard to all the markets in which authorised firms operate. The FSA Handbook approach is not enough; and it is not sufficient to give the regulators discretion on whether to issue codes or statements covering such ground.

A.5 The regulators need to take a more rigorous approach to the interpretation and application of the fit and proper person requirement; and take a tougher approach on banning and disqualifications.

A.6 The scope for abuse in all financial and commodity markets needs examination before finally deciding how the FSMA market abuse provisions should be widened, although interim measures covering Libor and other benchmark rates seem desirable if the wider market study cannot be completed reasonably quickly. A secondary legislation route may be desirable to enable the authorities to keep up with market developments.

A.7 The regulatory perimeter/the Regulated Activities Order needs to be kept under regular review; and the Treasury should report annually on their review on the adequacy of the perimeter and on the principles they follow in deciding the perimeter having regard to market/product developments, level playing fields and risks to consumers.

A.8 The authorities should be required to report on conflicts between their various objectives that arise in practice and on the principles they follow in dealing with such conflicts.

A.9 The regulators should be under an express statutory duty to supervise authorised firms (but with allowance for justified derogations --- the onus being on the regulators to justify).

A.10 There needs to be a review of the capacity of the Treasury to keep the adequacy of the regulatory legislation under review and to consider changes to associated secondary legislation.

A.11 The adequacy of co-operation between criminal enforcement bodies and regulatory authorities needs review.

Section B

Main points

(a) Deficiencies in banks’/financial firms’ conduct

B.1 It seems beyond dispute that there have been many egregious examples of lapses by banks in their conduct whether in terms of prudence (hence the need for rescues of eg RBS, the Bank of Scotland, Dunfermline BS) or of integrity (eg mis-selling of swap and other structured products; negligent advice on pensions and savings products; a slack approach on suitability/know your customer; money laundering (London seems to have a bad reputation in this area); Libor (and possibly other benchmark rate?) misreporting; breaches of sanctions; mis-selling of guaranteed capital certain investment products; inadequate disclosure of information relevant to consumers’ credit assessments; inadequate or misleading information on FSCS cover; inadequate disclosure of charges and interest rate changes; inadequate disclosure of information relevant to customers’ investment/deposit decisions where there have been material adverse changes since the original transaction; inadequate information on the implications of insolvency for investment or deposit products; failures to answer queries from customers/the public; inadequate response to complaints from the public/customers; mis-reporting to the authorities or failing to report material information—the list is not exhaustive). Lack of integrity in a bank’s conduct may have adverse prudential effects, eg reputational and confidence damage; fines; loss of authorisation. I note with concern the apparent lack of shock by the current regulators about the cumulative implications of the individual lapses; this may indicate a flawed regulatory culture. Such a flawed culture may have infected the culture of authorised institutions.

B.2 The deficiencies relating to both prudence and integrity point to material concerns as to whether the responsible individuals, whether by commission or omission, are fit and proper persons to hold their positions or in some cases any position. In some cases of less major lapses in relation to integrity, it may perhaps not be warranted to conclude that the bank’s conduct overall was not conducted with integrity; but in such cases it may be difficult to avoid concluding that the senior management responsible for the lapse were not fit and proper.

Recommendations

(b) Administrative reforms are not enough

B.3 It is not sufficient to rely on a more effective approach to regulation by the regulators whether within the framework of FSMA as it now is or as HMT currently proposes its amended form. The statutory requirements need to be more detailed and demanding, and greater transparency and accountability is needed for the regulators.

(b) Market abuse

B.4 There should be a study of whether all financial and commodity markets outside the scope of the FSMA market abuse provisions [eg the money markets] could be subject to abuse such that the FSMA provisions should be widened and tightened.

B.5 In this connection, I welcome the recommendation of the Treasury Select Committee that:

The Committee urges the Wheatley review to consider the case for amending the present law by widening the meaning of market abuse to include the manipulation, or attempted manipulation, of the LIBOR rate and other survey rates. They should also consider the case for widening the definition of the criminal offence in section 397 of FSMA to include a course of conduct which involves the intention or reckless manipulation of LIBOR and other survey rates.

B.6 But there is a serious question as to whether the TSC’s recommendation goes wide enough and whether therefore the Wheatley review will have sufficient scope. Also, it is not enough to look at evidence of actual abuse; the scope for potential abuse also needs consideration, having regard to market developments. Closing the stable door after the horse has bolted is not satisfactory. It may be that secondary legislation here plus a vigilant approach by the authorities is the best approach, building on improved primary legislation and better oversight of the regulators.

B.7 I raised with HMT in September 2011 the need to examine the adequacy of the width of the FSMA market abuse provisions and mentioned the earlier press reports [March 2011] of manipulation of Libor and Tibor (see C.1.2 below). HMT appeared to take no action then, which raises questions as to how well equipped HMT was and is to deal with such issues with sufficient sensitivity to the risks.

B.8 Tightening/widening of the market abuse provisions should be complemented by a strengthened and widened statutory code on market conduct covering all relevant markets and with adequate detail ; such codes should be kept under be updated as necessary and cover developments in the relevant markets.

B.9 There would need to be external scrutiny, by the TSC or otherwise, of the authorities’ approach to keeping the scope of market abuse provisions up to date.

(c) Threshold conditions/authorisation criteria

B.10 The FSMA Threshold Conditions (authorisation criteria) and in particular the FSA’s approach to the application of the fit and proper persons requirements for banks etc was too weak; and there is a good case for including in the primary statute an express, detailed and demanding integrity requirement plus amplified other authorisation criteria, eg on prudence , such as liquidity, bad debt provisions and capital on fitness and propriety (individuals and shareholder controllers), professional skills, adequate systems and controls, the “four eyes” requirement ( so that one individual does not dominate a firm unduly), non-executive directors and audit committees, and general catch-all provisions relating to the protection of depositors and other consumers --- bearing in mind the better approach in the Banking Act 1987. The main implications of the criteria should be spelt out in the primary statute. This can also draw on material in the current FSA Handbook on fitness and propriety and other matters but with improvements. The specification of greater detail should be accompanied by “without prejudice to the generality” provisions, so that the regulators can take account of matters not given detailed reference in the legislation but falling within the more general, umbrella language.

B.11 I noted to HMT in April 2011 the many concerns about the integrity of banks’ conduct. HMT appeared to take no action, I assume because they were content to rely on the FSA’s administrative actions. Again this raises questions on the capacity of HMT at the time to engage adequately on such issues, and what strengthening might be feasible.

B.12 The regulator’s practical approach on “enforcing” the fit and proper persons requirements also needed to be toughened to achieve a more effective approach on deterring unsatisfactory conduct and disqualifying persons who have fallen materially short of the required standards . Better and more explicit requirements in the primary statute should help to reinforce higher standards and restore the UK’s reputation in this area. But the regulators should also be bolder. Fitness and properness provisions in the primary statute should expressly cover amongst other things compliance with legal and ethical standards, knowledge and skills, and diligence and the track records of the persons in relation to the prudence and integrity of the institutions with which they have been associated. The current FSMA is too weak in these areas; and it is not sufficient to rely on the Handbook’s provisions on fitness and propriety.

B.13 A tougher approach on “fit and proper” and enforcement (disqualification/banning; removal orders; naming and shaming) by the new regulators may be easier to apply than criminal sanctions, though these appear to need to be tightened too.

(d) Transparency on the interpretation and application of the Threshold Conditions; and on the principles underlying the exercise of the regulators’ discretions

B.14 The primary statute should include a requirement that the regulators should produce an annual statement setting out their interpretation and application of the authorisation criteria as well as an account of the principles underlying the exercise of the regulators’ discretions in granting authorisation, withdrawing authorisation, restricting authorisation and exercising various regulatory powers (eg against persons deemed not fit and proper or where conduct lacks integrity). This should cover all relevant markets, retail and wholesale. The current FSA Handbook covers this ground inadequately and on some things apparently not at all. The statement should be updated annually but also ad hoc in the light of material developments. The provisions in FSMA on statements of principle and codes are not mandatory and do not go far enough.

B.15 At present we seem to have inadequate information from the FSA as its approach on a concrete, detailed level to the interpretation and application of the Threshold Conditions and equally importantly to the principles which underpin the exercise of its discretions/powers when a Threshold Condition is no longer fulfilled or there is a concern about fitness and propriety or a threat to the interests of depositors or other consumers. It is not at all clear how often in practice the FSA’s intervention powers become exercisable and how often in relation to such cases powers are actually exercised as against by voluntary action/moral suasion. We need greater clarity in the PRA/FCA world.

B.16 This point in B.14 has been raised earlier with HMT in 2011, but they seemed satisfied with FSMA’s provisions on these issues in its current state and took no action. Again there is cause to question HMT’s judgement; and the question again arises as to how HMT’s capacity can be strengthened.

(e) Express statutory duty to supervise

B.17 The regulators should have an express duty to supervise each authorised institution in the sense of keeping the fulfilment of the authorisation criteria and threats to the interests of consumers etc under regular review and of considering the exercise of intervention powers when their powers are exercisable or the seeking of remedial action by other means. (There was such a duty in section 1(1) of the Banking Act 1987,) This should help to ensure a tougher approach than the FSA took until the crisis. If there are cases where the regulators think appropriate only to authorise and not supervise an institution then the regulators should be required to justify their approach on particular categories of institution/business in published annual reports, taking account of risks to eg consumers and others. In other words, there needs to be greater transparency here.

B.18 The regulators should also be required make it much clearer to the public the limitations of their supervision (including the lack of supervision) where the institution is a branch of an overseas-incorporated institution, distinguishing EEA incorporated firms from firms incorporated outside the EEA. Regulators should also require authorised institutions in the UK , whether EEA passported or otherwise, to make clear the limitations of the UK regulator’s supervision and also the limitations of any FSCS cover with respect to the product in question.

(f) Non-executive directors and audit committees

B.19 The authorities should consider whether the standards required by or under the statute of NEDs and audit committees are adequate; we need potentially “uncomfortable” NEDs of undoubted integrity who are prepared to perform a gadfly role and challenge any approaches of the management which may be imprudent or inconsistent with integrity or professional skills standards. This can be seen as related to “the four eyes” requirement and any governance provisions that can help to keep some control over very dominant individuals. It may be desirable to impose a statutory duty on NEDs to report concerns to the regulators if they conclude that the management is not giving an adequate response. In such circumstances the NEDs may need some legal protection.

(g) Duties of confidentiality and duties to report concerns

B.20 The authorities should seek to ensure that duties of confidentiality do not hinder information flows between, for example, auditors and regulators or between criminal investigation or enforcement authorities and the regulators. There should be a presumptive duty for auditors to assist regulators; and probably a duty on both criminal investigators and regulators to assist each other in a proactive way. (The possible “reticence” of foreign criminal enforcement bodies and regulators in assisting their UK opposite numbers is an issue to be explored.) There also needs to be an alertness to the dangers of silo mentalities and practices in single bodies with a variety of functions and public policy objectives.

(h) Conflicts of interest between the various public policy objectives of regulators and the central bank

B.21 There should be an express requirement in FSMA or other legislation that the regulators (and the central bank) report, at least annually, on the conflicts themselves and on the principles guiding them in dealing with conflicts between their different public policy objectives. There is, for example, the potential for conflicts between some retail protection objectives and financial stability objectives; or between a sub-set of retail protection objectives; or between monetary stability objectives and consumer protection objectives; or between some objectives and any growth objectives. The conflicts may arise within a single authority or between several bodies.

(i) The adequacy of (i) regulatory perimeter and (ii) scope of market abuse provisions

B.22 The Treasury should report annually on the adequacy of the regulatory perimeter/the Regulated Activities Order and, in adequately detailed terms, on why particular products are within or outside the perimeter, having regard to consumer protection, FSCS cover, financial stability, level playing fields, different group structures for financial products, and product development as well as EU requirements. There are two “perimeters” to consider: one as regards requirements for authorisation and regulation (the Regulated Activities Order); and one for the market abuse provisions.

(j) Appropriate legislation

B.23 The most appropriate legislation for incorporating the points above would be the Financial Services and Markets Act (being amended by the Financial Services Bill) rather than the Banking Reform Bill. But it is not clear that the government’s timetable would permit this. On the face of it, one would expect the Banking Reform Bill to be primarily concerned with the follow through to the Vickers proposals. This said, there are a number of ways of skinning the cat.

Section C

Detail

Market abuse

C.1.1 I wrote to HMT last year (September 2011):

118: Market abuse

“33. I assume that the authorities have considered whether there is any case for extending the scope of the market abuse provisions to other significant financial markets where there could be scope ‘abuse’ (in the sense of ordinary language). I am not in any sense pressing the case for extension. Doubtless the Treasury will have sounded out various market experts, although many players would of course hesitate to invite greater regulation. ( I am not clear how the present accusations about manipulation of eg Libor and Tibor fit into the FSMA framework.)”

C.1.2 As noted there were press reports in 2011 on the possibility of investigations of Libor and Tibor manipulation, see Reuters report March 2011:

LONDON/WASHINGTON, March 17 (Reuters)—Regulators are probing whether a handful of major banks manipulated a global benchmark interest rate to tart up their credit quality, a person familiar with the matter said on Thursday.

Bank of America (BAC.N), Barclays (BARC.L), Citigroup (C.N), WestLB [WDLG.UL] and UBS (UBSN.VX) are the focus of the investigation by regulators in Britain, Japan and the United States, said the source, who asked not to be named.

Swiss bank UBS had said on Tuesday it received subpoenas from Japanese and U.S. regulators regarding whether it made “improper attempts” to manipulate the London interbank offered rate, known as Libor.

Investigators are probing whether banks understated Libor to reduce their borrowing costs and downplay investor panic during the financial crisis. Among the data examined are discrepancies between offered rates and some banks’ credit risks, as measured by credit-default swaps.

I do not know if the Treasury considered my suggestion that the adequacy of the scope of the market abuse provisions should be examined or the possible implications of the March 2011 Reuters report I could not second guess their approach as I have no detailed knowledge of the relevant markets, although I did flag that the Libor investigations, as reported in the press, pointed to one area where there could be a prima facie case for change. In the event the draftsman of the FSMA amendment bill did not seem to pick up the point. It now seems clearer that much greater consideration should be given to financial markets outside the scope of the current FSMA market abuse (or indeed insider dealing) legislation such as the money markets and possibly the foreign exchange market, and not just benchmark rates; and I would suggest, as a lay outsider, that relevant experts should do some early work on the markets outside the current FSMA market abuse provisions to identify them [not just the money markets], to analyse the scope of potential abuse (in the widest sense), the experience of any abuse (again in the widest sense) that has or may have occurred and to look at possible deterrents and regulation. It seems better to anticipate possible abuses and seek to prevent these, rather than wait until abuse occurs and then act by tightening legislation. Even if it were concluded that other markets do not need the extensions of the market abuse provisions, a study, up dated from time to time still seems desirable.

C.1.3 Consideration should also be given to extending the scope of the criminal law in this area, with specific provisions for the particular financial markets. But it is important to realise that the burden of proof may be a major hurdle in some criminal cases, so that the potential for a regulatory response (with a less onerous burden of proof but still with adequate natural justice safeguards) may be a more appropriate and effective.

C.1.4 It also seems necessary to have wider and more detailed codes, or a consolidated code, for a wider range of markets so that financial institutions and the public have a better understanding at a more concrete level of practical minimum standards and of what is unacceptable and of “grey areas”, where doubtful behaviour should be avoided. There is need to have codes which have adequate detail and are not at an excessively high level of generality.

C.1.5 I would repeat too that I do not think that the authorities should adopt a “closing stable door” approach and only seek to close regulatory gaps after a scandal has occurred.

C.1.6 I have noted and welcome the recommendation of the Treasury Select Committee’s preliminary report which says:

“199. The Committee urges the Wheatley review to consider the case for amending the present law by widening the meaning of market abuse to include the manipulation, or attempted manipulation, of the LIBOR rate and other survey rates. They should also consider the case for widening the definition of the criminal offence in section 397 of FSMA to include a course of conduct which involves the intention or reckless manipulation of LIBOR and other survey rates.”

C.1.7 There is a question as to whether the scope of the Wheatley review is wide enough and whether it will look beyond “survey rates”. See my comments in the summary above.

Integrity

C.2.1 Last year I urged the Treasury to include an express requirement that banks conduct their business with integrity and professional skills ( as under the Banking Act 1987); and a requirement that the regulators set out in a published statement , updated at least annually, their approach to the interpretation and application of the integrity criterion. On 12 April 2011 in a letter to Mr Levendoğlu of HMT I said, inter alia,:

“I am concerned that the FSMA contains no express and prominent integrity requirement for banks; and I think that this is a great pity especially given the palpable lack of integrity in the conduct of some banks, including in advertising and in the promotion of some financial products, in general transparency, in answering questions, in dealing with complaints. The lack of integrity by the firms reflects too on the integrity on the responsible management. I note that the Banking Act 1987 included such a requirement in the minimum authorisation criteria; but that the Labour government decided to drop that presumably given their preference for “light touch regulation” and their wish to boost the City. The FSMA threshold conditions do not include such an express requirement the fit and proper requirement in FSMA and the FSA’s application of it seem to be feeble. I know that some City practitioners and some regulators are uneasy about ethical or moral requirements …. but their discomfort is not a good reason for not re-introducing a requirement of this kind.”

C.2.2 I appreciate of course that the approved persons regime and the Threshold Conditions, plus the detail in the Handbook, provide some safeguards, but the track record provides only limited assurance and sometimes considerable cause for worry. Given the weaknesses in the current FSMA/FSA regime, I think that there is a good case for including in the primary statute a non-exhaustive definition of “integrity” to include compliance with legal and regulatory requirements, codes of practice, and recognised accounting and reporting standards with recognition that compliance with all this does not necessarily ensure integrity in conduct, so it would be a necessary but not a sufficient condition.

C.2.3 I do not know the Treasury’s thinking on this; but I would strongly contend that the current Threshold Conditions and the regulators’ interpretation and application of them are not adequate or detailed enough.

More detailed/better Threshold Conditions or minimum authorisation criteria in FSMA

C.3.1 Against the background of the above and what I have heard so far on the Libor scandal, I have urged the Treasury to expand the Threshold Conditions to include the requirements as captured in eg the Banking Act 1987 minimum authorisation criteria. I noted earlier:

“The judgments should have regard to something like the Banking Act 1987 authorisation criteria rather than the more general FSMA threshold conditions. The Banking Act criteria covered eg fit and proper persons; four eyes management; roles of NEDs/audit committees; adequate net assets and adequate liquidity taking account of all factors, including group and external threats; general prudent conduct taking account of eg business plans and adequacy of planning controls and new product preparations; adequate provisions for bad debts including possible bad debts; adequate accounting records; adequate systems and controls; carrying on business with integrity and professional skills; minimum net assets; and a sweep up provision. The FSA’s threshold conditions were vaguer and the specific statutory underpinning weaker.”

C.3.2 The Banking Act 1987 criteria were:

“Para 1: Fitness and properness

The judgement relates to the particular position, thus requiring a particularised judgment taking account of all the relevant factors rather than a ‘clunking’ application of a rule. The judgment has to cover probity, competence, soundness of judgment, diligence, and likelihood of threats to the interests of depositors or potential depositors ‘in any way’.

Para 2: Two individuals effectively directing the business

Para 3: Composition of board of directors/role of NEDs

Para 4–5: Business to be conducted in a prudent manner, including

adequate net assets etc including having regard to nature and scale of operations, interests of actual and potential depositors, risks from other group companies

adequate liquidity, including having regard to actual and contingent liabilities, maturity matching and stock of liquid assets, risks from other group companies

adequate provisions for bad debts, including possible bad debts

adequate accounting and other records ; adequate systems and controls for prudent conduct and fulfillment of duties under the BA

any other considerations relevant to general prudent conduct

Para 5: carrying on business with integrity and professional skills

Para 6: Minimum net assets

C.3.3 I have also suggested to the Treasury that in addition to having a non-exhaustive definition of “integrity” as suggested C.2 above, the primary statute expands on the meaning of “professional skills” and “fit and proper person” [for directors, controllers, managers] requirement expressly covers knowledge, skills, probity, diligence, judgment, threats to the interests of depositors and investors (see below). Given Fred Goodwin’s record (and the record of other dominant individuals in other firms) more might be said about the “four eyes” requirement.

C.3.4 Having all this set out in the new primary statute should help to restore the United Kingdom’s reputation in the financial sector, following the banking crises, the Libor, swaps mis-selling and other scandals, and set a more obvious and demanding standard for the regulators if we also have effective regulators. We should learn the lessons of the FSA’s record under the current FSMA framework; and should not assume that possible recent administrative improvements should be sustained.

A statement of principles on Threshold Conditions, authorisation, revocations, discretion on the use of powers etc

C.4.1 And, as I have argued before, it is vital that such Threshold Conditions are complemented by a self-standing statement by the regulators annual and up dated ad hoc and put to Parliament that explains in detail the regulators’ approach to the interpretation and application of each of the detailed criteria relevant to authorisation and details of the principles underlying and guiding the regulators’ approach to authorisation, the restriction of activities, the withdrawal of authorisation, the seeking of liquidation and administration orders, including the use of formal, statutory powers or the encouragement of “voluntary” action.

C.4.2 As far as I can see, the FSA’s Handbook and other reports do not satisfactorily cover all the point in paragraph C.4.1 above. Requirements on the FSA on codes and statements seem inadequate, with too much discretion for the regulators. As it is, it is difficult for laymen and the “ordinary consumer” to understand the current regulators’ approach for example,

how often do the regulators’ intervention and revocation powers become exercisable?

how often are they exercised when the powers are exercisable? how often do they seek remedial action without the use of statutory powers?

what principles are applied here?

how are conflicts of interest in public policy objectives dealt with? Or does the Treasury think that there should not be transparency about such matters or that current transparency is adequate and if so why?

C.4.3 The statements that I have in mind would be in addition to the Handbook, although overlap with parts of it. But in any event the current Handbook’s approach is inadequate. Parliament should want to know such information.

Fit and proper person requirement

C.5.1 As an example, it seems to me evident that the FSA’s approach to the interpretation of the fit and proper person criterion has been inadequate as admitted by Hector Sants, for many years the FSA did not seem to take account of competence, knowledge, experience, diligence, and apparently concentrated on a narrow view of probity [no criminal offence or formal disqualifications]. The Handbook now suggests that the FSA is taking a more rigorous approach, covering more of the key elements of fitness and propriety. But the history here points to the need for legislative strengthening as well. Also, the FSA seems also to have been feeble in taking action against individuals whom on any rigorous approach would not be considered fit and proper, especially when the relevant individuals were palpably in charge when the institution concerned was guilty of illegal or very dubious activities or bad breaches of rules or mis-selling or imprudence.

C.5.2 On having an amplified fit and proper person requirement in the primary statute, it needs to be wholly clear which persons are covered by the requirement; and there seems to me a good case for defining the criterion in the statute to capture explicitly amongst other things probity/integrity, competence, knowledge, judgement, skills and diligence, threats to the interests of depositors, investors etc. Regulators ought to be able to apply this by disqualifying persons from a particular position or “banning” them more widely without the regulatory burdens for them or the regulated firms being disproportionally onerous, whilst still allowing sufficient scope for administrative law/natural justice protections. And Parliament ought to scrutinise the regulators’ application and “enforcement” of the fit and proper person requirement. We need to avoid the previous and possibly current limpness of the FSA.

Conflicts of interest between the objectives of the Bank and two new regulatory bodies

C.6.1 I must repeat my concerns, expressed to the Treasury earlier, that I am not at all convinced that the proposed FSMA amendments will impose satisfactory requirements on the central bank and the regulators to report annually and ad hoc on any material conflicts of interest between the bodies’ public policy objectives, as exemplified in particular cases and decisions, and on how the conflicts are settled and according to which principles. If there are no express provisions included in the legislation, how do they think that such transparency will be effectively delivered? My earlier letter to the Treasury gave examples of possible conflicts of interest. For example, what if action were taken in respect of mis-selling might well lead to adverse confidence effects and a run which damaged the interests of depositors? How would the PRA exercise its veto power over the FCA in such circumstances? (Many other examples could be given.) What would the regulators’ response be? I do not think that deliberate mis-reporting or the deliberate suppression of such information relevant to credit assessment can be tolerated here surely the principle has to be Fiat justitia ruat caelum ? Should the statute recognise this? Also, how is Treasury policy here related to the authorities’ general policy on disclosure by banks on their financial condition and prospects, bearing in mind the tensions between the desire for transparency and caveat emptor on the one hand, and, on the other hand, the concern not to cause adverse confidence effects, such as bank runs, which might otherwise be avoided. The existence of depositor compensation arrangements does not wholly allow the authorities to square the circle, as it were, given the limitations of and gaps in the compensation scheme and in the Regulated Activities Order.

Keeping the adequacy of the Regulated Activities Order/the regulatory perimeter under review

C.7.1 I am disappointed that the draft FSMA amendment legislation does not impose any requirements on the authorities to report annually on their reviews on the adequacy of the RAO bearing in mind concerns about regulatory gaps, new financial products and product developments, and the lack of level playing fields. I would urge the Treasury to consider this, and in any event give their views on my case for transparency here. The Treasury’s own record to date on this seems to have been disappointing, with extreme reticence in explaining their policy thinking. I remained concerned that there are some lacunae here; and that lacunae could emerge in future, with the authorities behind the game.

C.7.2 The argument for having a more rigorous and transparent process on the scope of the RAO also applies mutatis mutandis to the scope of the market abuse provisions.

23 August 2012

Prepared 24th June 2013