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Policy
Responses to Specific Questions
60. The BSA responds below to a number of the specific questions set out in the CP but, in the interests of brevity, we have omitted questions to which we have no particular contribution to make; mainly, those that are bank-specific. The CP refers to "banks" for short (except when specifically referring to building societies), but it applies to all types of credit institution, including building societies. However, we mirror the CP's use of the term 'bank', unless the question applies to building societies only. (i) General 1.1) Please provide detail if you think that any of the proposals in this document:
We believe that a proportionate approach, before introducing radical, complicated legislative change, would be to –
(See especially paragraphs 15 – 19 and 22 – 25 above). 1.2) To what extent are the proposals in this document mutually reinforcing? The proposals range from modest, sensible modifications to major, structural changes and, throughout the CP there are proposals that, if not very carefully worked through, could have serious unintended consequences. We believe that a more targeted approach would be preferable (see above). 1.3) The proposals in this consultation document, unless specified, are intended to be implemented by banks, building societies and other deposit-taking firms. Please provide details where this is not appropriate. We agree with this proposal. All institutions that take deposits should be subject to the same, or equivalent, provisions. (ii) Stability and resilience of the financial system (Chapter 2) 2.1) Do you agree with the actions being taken by the Authorities in the UK to improve stress testing by banks? We agree with the actions being taken. The limitations of stress testing are broadly recognised; for example, that such testing tends to place too much reliance on known historical events. Indeed, Northern Rock's stress testing failed to stand-up to the circumstances it ultimately faced. The Treasury Committee Report stated –
The BSA supports the recommendations of FSA's internal audit (set out in paragraph 3.5-6 of Appendix 2 to the report) ie not to add further Handbook rules and guidance on liquidity for the time being, but to consider the case for future amendments to make it easier to understand the body of material on stress testing. 2.2) Have the Authorities correctly identified the issues on which international work on stress testing and risk management should focus? Clearly, there was a fundamental international background to the Northern Rock crisis and it is right that the Authorities should work in co-operation with international partners. It is, therefore, appropriate that the FSA should intensify its work with banks to improve stress testing, on the basis outlined in paragraph 2.35 of the CP. We agree with the areas of work set out, especially testing to more extreme scenarios. Stress testing should be part of a firm's risk assessment work. The BSA agrees with the conclusion set out in paragraph 2.40 of the CP that the Authorities should co-operate with international partners to seek to achieve more consistency in liquidity regulation. We also welcome the FSA's discussion paper on the subject (DP 07/7) issued in December 2007, which we responded to at the end of March 2008. However, the matter will require very careful management. On the one hand, it is crucial that the UK does not introduce mandatory requirements that could adversely affect the competitiveness of UK businesses, unless equivalent arrangements are introduced across the EU. On the other hand, firms that are potentially exposed to liquidity risk must recognise that risk and take appropriate steps to address it. 2.4) Do you agree with the actions being taken by the Authorities to encourage full and consistent valuation and disclosure by banks? The BSA agrees with the CP that securitisation is likely to remain an important element of the financial system and the BSA believes it very important that securitisation remains as a significant mechanism. The BSA agrees that recent events have highlighted certain problems relating to asset backed securities, notably regarding the valuation of structured products during difficult market circumstances. As the FSA informed the Treasury Committee, Northern Rock's 'Granite' securitisation met industry norms. Therefore, the international initiatives described in paragraph 2.45 are to be welcomed. The BSA agrees with the CP that "it is important not to rush to take regulatory action before the markets have had time to adjust to recent events", and the forthcoming international work – especially concerning consistency and transparency of valuation methodologies, is welcome. 2.5) Have the Authorities correctly identified the issues on which international work on accounting and valuation of structured products should focus? Yes, we believe so (see above answer). 2.6) Have the Authorities correctly identified the issues on which international work on credit rating agencies should focus? The BSA does not have enough direct experience of the operation of credit rating agencies to be able to respond in detail to questions 2.6, 2.7 and 2.8. However, under Basel II, the importance of CRAs is undoubtedly increased (eg because of the importance of ratings under the standardised approach); therefore, the matter should be reviewed. It does seem clear that this is a further topic that hinges largely on international co-operation and the BSA supports the Authorities' plans to act in a co-ordinated way with international counterparts. 2.7) Do you agree with the Authorities' proposals to improve the information content of credit ratings? Yes, we believe so (see above answer). 2.8) Do you agree with the Authorities that the preferred approach to restoring confidence in ratings of structured products is through market action and, where appropriate, changes to IOSCO Code of Conduct on Credit Rating Agencies? Yes, we believe so (see answer to question 2.6). (iii) Reducing the likelihood of a bank failing (Chapter 3) 3.1) To what extent do the FSA's range of existing powers reduce the likelihood of failure of a bank, and under what circumstances would they not be effective? The FSA chief executive recently said –
However, FSA's internal audit report (see especially paragraphs 10 – 27 of the report) highlights a series of very basic failures. It is difficult to see how the more senior staff in the FSA would not have recognised the problems with Northern Rock and (presumably) sought to have dealt with them, had these failures not occurred. Indeed, FSA internal audit reports (at paragraph 26) –
3.2) Are the FSA's existing powers, and in particular, the application of them, clear, and how could they be further clarified? The FSA's existing powers – outlined in paragraphs 3.3 to 3.12 – seem clear and proportionate, in particular the bank-specific risk assessments, visits, thematic reviews and 'skilled persons reports', supplemented by the more overt powers such as corrective action, Own Initiative Variation of Permission procedures, power to remove directors etc. There also seems to be appropriate arrangements for escalation of intervention. Provided they are used in a prompt and diligent fashion, they seem to provide adequate arrangements. 3.3) To what extent are the annual and one-off costs of the new information requirements on banks proportionate? Can they be quantified? In principle, we support the introduction of an enhanced FSA power to require information at short notice, provided the information is necessary in order to enable the FSA to decide whether or not exercise its powers. While we recognise that it might not be possible to identify, at this stage, the information that is likely to be sought, it would be important to clarify this so that firms can introduce relevant systems and procedures. It is important that any proposed changes be subject to proper cost benefit analysis. We would like the FSA to have all the reasonable tools it needs to do its job but must stress, once again, that the most comprehensive set of tools possible would be of no effect unless used effectively. It is also, as noted above, important that the FSA are transparent with the industry about why it requires particular types of data and how it will be used. 3.4) How effective would the new information requirement be in identifying and addressing a sudden deterioration in a bank's financial soundness? This is a difficult question to answer in a decontextualised way, but – as stated above – in principle, we support the FSA being able to get the information it needs to identify a sudden deterioration in a firm's financial stability. But it also needs to be remembered that Northern Rock's 'deterioration' (in the sense of its development – over years – of an unsound business model) was not sudden – and it is just as important to monitor, and to be able to address, gradual deteriorations. 3.6) Do you agree with the proposal for a new and flexible regime for payment systems oversight and, if so, how should its scope be defined? The CP does not provide enough information for the BSA to be able to comment, other than superficially on the point, but we note that a further, more detailed, consultation will be published. We can see a case, in principle, for better oversight to help avert the spread of contagion through the system. However, we can see no strong case for broader Government powers in relation to a system that, generally speaking, works well. 3.7) Which elements of such a payment systems regime should be effected through statutory powers? See above answer. 3.8) To what extent is the current provision to register charges at Companies House relevant to banks? Do you agree that it is appropriate to amend it? We doubt that an extension of the 21–day period, would make much difference because, if the problems had not been addressed within 21 days, then either it will be too late for a 'quick fix' to alleviate them or the news will have reached the public domain. In any case, we agree that third party lenders could be unfairly prejudiced 3.9) Should any exemption for banks only apply to receipt of ELA, or should there be a more general exemption for all types of lending? The BSA agrees with the CP that, in very special circumstances, there could be strong arguments for delaying disclosure of emergency liquidity assistance (ELA) until temporary problems have passed (paragraph 3.38). Equally, we agree with the later statement, in paragraph 3.40, that in today's markets maintaining confidentiality of ELA may be extremely difficult. Despite this, and notwithstanding our support – in all but exceptional cases – for transparency, it is just possible that a delay in disclosure might buy a very short period of time in which temporary problems could be addressed. Therefore, it is right that the FSA should review the guidance on the Disclosure and Transparency Rules. 3.10) Would extending the 21-day period be a viable, alternative proposition? See answer to question 3.8. 3.11) What would the effect be of removing the 'weekly return' reporting requirement? What other statutory reporting requirements disclose ELA? This seems to be a modest measure that could potentially be helpful in the kind of circumstances envisaged. 3.12) Do you agree that the Bank of England should be provided with statutory immunity for any acts or omissions which relate to its role in providing financial stability and central bank functions? The BSA agrees in principle, but only if the immunity is drawn narrowly to capture steps taken to seek to avert a financial crisis. 3.13) Do you agree that it is appropriate for the Bank of England to be able to rely upon its security in all such circumstances? Again, this might be acceptable in principle, subject to appropriately narrow drafting. (Please note: question 3.13 is worded differently in the body of the CP, on page 45). 3.14) Do you agree that funds provided by the Bank of England should be exempted from calculation of building societies' wholesale funding? 3.15) What risks are there to building societies granting floating charges over their assets to the Bank of England? (iv) Reducing the impact of a failing bank (Chapter 4) 4.1) Do you agree that there should be a special resolution regime for banks? The BSA is not convinced of the need for such fundamental change as would be represented by a SRR. Rather than introduce an entirely new process, we believe that it would be more appropriate, first of all, to examine whether current insolvency legislation or corporate rescue regimes could be amended to achieve the relevant objectives (see paragraph 23 above). The effective use of the FSA's supervisory tools is also fundamental to this matter and, if utilised properly, should avert the need for SRR arrangements. 4.2) Do you agree that the trigger for a bank entering a special resolution regime should be based on a regulatory judgement exercised by the FSA in close consultation with the Bank of England and HM Treasury? We agree and cannot see any other way in practice that this could sensibly be handled. The decision should be based on key factors including the inability of the bank to meets its liabilities, confidence in the institution, prospects of recovery etc. 4.3) Do you agree that the trigger should be linked to regulatory guidance material? This seems appropriate. 4.4) Do you agree with the special resolution regime as outlined? We are not yet convinced that there is a need to introduce this complicated mechanism but, if it were to go ahead, it should be used only in extreme circumstances where other mechanisms have failed or where it clear, at a very early stage, that they would not be effective in the circumstances. 4.5) Do you agree that the potential abridgement of property rights in the special resolution rule regime can, in principle, be justified with a suitable public interest test? This is one of the key aspects of the CP where unintended consequences could arise. The BBA response helpfully sets out some specific issues. 4.6) What safeguards and appeal processes would be needed to support a public interest test for the special resolution regime? We have no specific comments, but welcome the assurances given in paragraph 4.18 of the CP, and the Government's plan to ensue that arrangements are fully compliant with State aid rules and competition law. 4.7) Do you agree that the Authorities should have the power to direct a sale of a bank possibly against the wishes of the directors and shareholders? This is one of the few aspects of the CP where – because of their distinctive corporate status - banks and building societies are subject to different considerations. As a matter of overall principle, we agree that it should only be as a very last resort, or in extremis, that people should be deprived of their property rights. However, it is highly unlikely that building society members – as depositors, rather than external shareholders – would wish to block appropriate exercise of such powers. 4.8) Is judicial review the correct mechanism for challenging a decision to institute the directed transfer? Judicial review might be one method of challenge but it is a process that sets high, procedural hurdles and, in no way, acts as an 'appeal' on merits or on the validity or correctness of substantive decisions. 4.9) Is the Financial Services Tribunal the right forum for resolution of transactional issues such as valuation or distribution of proceeds among stakeholders? The terms of reference and expertise on the Tribunal seem too narrow for this purpose. Possibly, with an expanded remit and additional expertise seconded in, the Tribunal might be able to carry out what is likely to be a rarely exercised function, but on balance the BSA favours judicial oversight. 4.10) Do you agree that, in tightly defined circumstances, the Authorities should be able to take control of a failing bank through effecting a transfer of some or all of its assets and liabilities to a bridge bank? Do you agree that some flexibility in the description of these circumstances is also desirable? If there is to be a special resolution regime then, logically, a bridge bank should be a feature of it. 4.11) Do you agree with the removal of shareholders' and directors' rights and temporary suspension of creditors' rights under this bridge bank proposal? This is another fundamental matter of existing property rights –whatever the outcome, the matter must be carefully considered and any unintended consequences thought through. It may be that such removal/suspension is integral to the success of the regime, but we believe that pre-legislative investigation (as described in paragraph 11 above) would be very important. 4.12) Is judicial review the correct mechanism for challenging a decision to transfer to a bridge bank? See reply to question 4.8 above. 4.13) Is the Financial Services Tribunal the right forum for resolution of transactional issues such as a valuation or distribution of proceeds among stakeholders? See reply to question 4.8 above. 4.14) Should a new bank insolvency procedure be introduced for banks and building societies as an option for the Authorities instead of normal insolvency procedures? The BSA does not believe that a substantial case is currently made for radical changes, such as a new bank insolvency procedure. We believe that a proportionate approach, before deciding whether or not to introduce radical, complicated or potentially far-reaching changes, would be as outlined in paragraph 14(iii) above. 4.17) Should a bank insolvency procedure be subject to the overall supervision of the Authorities? If introduced, yes. 4.26) Do you agree that the special resolution regime should be extended to building societies but not other mutuals? We do not believe that a convincing case for a special resolution regime has been made but, if it were to be introduced, we believe banks, building societies and - in principle - other mutuals should all be on the same footing. However, we are not aware of any other deposit-taking mutuals that are of a size where the proposed SRR would, should the need to use it arise, are of a scale whereby be relevant or applicable. 4.27) Do you agree with the proposals for a new accelerated direct transfer procedure for building societies, similar to that for banks? See above answer. 4.28) Do you believe that a form of temporary public sector control through a bridge bank should be provided for building societies? See above answer. 4.29) Do you agree that a building society insolvency procedure should exist for building societies alongside a similar model for banks? We do not believe that a convincing case for a special insolvency procedure for banks and building societies has been made but, if it were to be introduced, we believe that banks and building societies should be on the same footing. 4.30) Do you agree that the Treasury should make an Order under the 2007 Act to ensure that, on the winding up or dissolution of a building society, any assets available to satisfy the society's liabilities are applied equally to creditors and members. We strongly agree. 4.31) Should the industry contribute towards the costs of an SRR? We see no reason why it should. In addition to corporation and other taxes, the industry funds the FSA and the Bank of England. The costs in question could presumably be met from the dissolution or transfer of the firm. However, if the industry in general was to be required to contribute, we do not believe that firms too small for the SRR to apply should be expected to do so. 4.32) Would mechanisms other than the FSCS be appropriate for addressing such cost issues? How might such mechanisms work? This is yet another matter that would no doubt benefit enormously from pre-legislative scrutiny, the input of expert working groups etc. This comment applies to many of the other matters covered in the paper, especially in chapter 4 (see paragraphs 11 – 12 above). (v) Consumer confidence and compensation arrangements (Chapter 5) 5.1) How would a higher compensation limit affect consumer confidence? It seems unlikely that a higher compensation limit would have a substantial impact on consumer confidence. As the research quoted in the CP shows, the level of awareness of the compensation limit remains very low – at only 1% of respondents - even after the Northern Rock run (see paragraphs 30 – 31 above). It seems likely that certainty of payout is more significant to consumer confidence than the size of the limit. In the United States, the deposit protection fund operated by the Federal Deposit Insurance Corporation is backed by the US Government and that gives great assurance to depositors about the ability of the scheme to meet its commitments. A similar arrangement for the UK scheme would provide necessary comfort to depositors about the strength of the FSCS. However, the Authorities response to this issue should depend on their assessment of the overall importance of providing this degree of reassurance to borrowers – currently the BSA is neutral on this issue. Formal, explicit taxpayer backing for all deposits up to £35,000 would be a very significant step and the BSA does not currently advocate this approach. 5.2) How would a higher compensation limit affect the responsibility consumers have for their financial choices? Raising the compensation limit per se is unlikely to have any impact on consumers' responsibility for their financial choices. However, if coupled with awareness-raising measures, it is possible that this will prompt consumers to act less responsibly, in the knowledge that there is a safety net should things go wrong. To the extent that greater awareness of compensation limits raises the prospect of increased intermediation in the deposit market (as suggested above, see paragraph 33), consumers' responsibility for their financial choices would be diminished, as they delegated responsibility to intermediaries. This would be the case whether or not the compensation limit was increased. 5.3) How would a higher compensation limit for deposits affect consumer perception of other financial products? There is a risk of market distortion if the compensation levels for customers of one class of financial services provider are disproportionately high. 5.4) Which of the solutions to cover balances above the compensation limit is the most practical, desirable and/or proportionate, and why? As noted above (see paragraph 32), in the light of the Association's research, we question whether a clear practical case could be made for an increase to the current limit. Indeed, an increase in the limit would raise the value of FSCS cover, but would have little effect on the number of depositors benefiting from the protection. 5.5) What types of large balance should be subject to additional protection, and in what circumstances? We cannot see many circumstances where there is a case for special treatment. Generally speaking, provided there is a transparent deposit protection limit, customers will make a judgment, balancing the very small risk of a firm collapsing against the interest rates on offer in the market. Nevertheless, we recognise that there are limited situations where customers do not have the same degree of control over their balances as customers in the normal run of things. We agree that the most likely cases those where the customer has a large balance for a very short time (house purchase, insurance pay-outs etc) and/or where the moneys are held in a professional firm's client account. This matter would require careful consideration and we welcome the FSA consultation mentioned in paragraph 5.17. 5.6) Are there any other circumstances, apart from client accounts, where consumers have little influence on where the accounts are opened? What are your views on how the issue of client accounts might be addressed in relation to compensation payments? Possibly certain trustee accounts. 5.7) What are your views on a one-week target for FSCS payment? In our view, it is far preferable to introduce practical measures to speed up payments to depositors, under the current FSCS arrangements, than to bring in pre-funding (see answer to question 5.21 below). While we fully support very prompt compensation payments, a one-week target would be too ambitious in practice, especially if extended to all deposits in the failed institution. Although improvements should of course be aimed for, a realistic view must be taken of what is actually achievable. 5.11) How quickly could banks make changes to have then necessary information readily available on account balances of FSCS-eligible depositors, and what would the cost be to them? See the answer to question 5.14 below. 5.12) Should banks follow a common data standard format, and, if so, what would this entail? Whilst the imposition of a common data format for all banks and building societies might be administratively convenient for the FSCS, it would represent a considerable burden on building societies, particularly smaller ones, where the costs are likely to be wholly disproportionate to any potential benefit. 5.13) What information should be included in a single customer view and what would be the implications for firms of different information requirements? See the answer to question 5.14 below. 5.14) How would banks place a 'flag' on accounts that are not eligible for FSCS payments? The above four questions give rise to potentially significant systems implications and the suitability of FSCS requirements. There could be very significant costs, especially for smaller institutions, and there is a real risk of 'over-engineering' implicit in this part of the CP. 5.15) Are there any other classes of depositor that should be ineligible for FSCS compensation payments and, if so, who? We do not believe so – the exclusions in COMP seem to be well thought out, practical and fair. 5.16) To what extent would gross payments help maintain depositor confidence and speed up payment? This is a key topic on which unforeseen consequences might arise and any changes should be carefully thought through eg how the FSCS ultimately deal with set-off aspects. However, we can see some advantages – in principle – to gross payments (see paragraph 42 above). 5.17) To what extent are gross payments justified by maintaining depositors' access to liquidity? See above answer. 5.18) What are your views on the link between FSCS gross payment and set-off? Provided existing rights are not affected, we see these matters as compatible. 5.19) Are there any other measures necessary to better align FSCS rules and the provisions of the proposed bank insolvency procedure? We remain unconvinced that introducing an entirely new procedure is necessary and believe that the possibilities for amending existing arrangements should be examined first. 5.21) What are your views on the introduction of an element of pre-funding into the FSCS? The BSA opposes pre-funding for the reasons set out in paragraph 38 above. 5.22) What steps would need to be taken to ensure that pre-funding would be compatible with other elements of the FSCS funding arrangements? We oppose pre-funding and believe that it would be counter-productive (see paragraph 38 above). 5.23) What are your views on whether the FSCS should be permitted to borrow from the Government or the Bank of England? We believe that this would be a sensible arrangement to have in place. Moreover, we consider the UK Government should put in place an arrangement similar to that in the United States, where the FDIC scheme is backed by the “full faith and credit of the United States Government”. Such backing might be the most effective way of ensuring consumer confidence in the compensation scheme, whilst avoiding the disproportionate and damaging drain on the industry’s resources that pre-funding entails. However, whilst this is not a BSA policy, this matter needs to be given consideration if consumer confidence is the Authorities’ key objective. 5.33) What are your views on the use of risk-based levies or on the introduction of behavioural factors into the calculation of levies? In principle, it could be argued, that the matter should be reconsidered, in the light of (but not restricted to) the Northern Rock problem, and firms that do not have the fundamental building blocks of prudent management including, for example, proper capitalisation, should pay higher levies. However, it is difficult to see how risk-based levies could work unless there was pre-funding. Indeed, publicity could be destabilising (see paragraph 43 above) and risk-based levies could be perceived as 'duplicating' the role of the FSA. For the reasons given above, we strongly oppose pre-funding and, therefore, are not pressing the case for risk-based levies. 6.1 – 7.4) Various questions The BSA supports the proposals underlying all of these questions.
Footnotes 1. Section 7 of the Building Societies Act 1986 provides that at least 50% of the funds of a building society (or of the society's group) must be raised in the form of shares held by individual members of the society. The Building Societies (Funding) and Mutual Societies (Transfers) Act 2007 enables (but does not require) the Treasury to consult on a power to increase the limit by order to not more than 75%. Section 6 of the1986 Act provides that at least 75% of the "business assets" of a building society (or of the society's group) must be loans fully secured on residential property. "Business assets" (not a term actually used in section 6) are total assets (or total group assets) plus provisions for bad and doubtful debts, less fixed assets, liquid assets and any long-term insurance funds, and currently comprise mostly mortgage assets. Treasury may reduce the limit by order to not less than 60%.Section 6 of the1986 Act provides that at least 75% of the "business assets" of a building society (or of the society's group) must be loans fully secured on residential property. "Business assets" (not a term actually used in section 6) are total assets (or total group assets) plus provisions for bad and doubtful debts, less fixed assets, liquid assets and any long-term insurance funds, and currently comprise mostly mortgage assets. Treasury may reduce the limit by order to not less than 60%. 2. www.fsa.gov.uk/Pages/Library/Communication/Speeches/2003/sp139.shtml 3. Run on the Rock House of Commons Treasury Committee 26 January 2008 www.publications.parliament.uk/pa/cm200708/cmselect/cmtreasy/56/56i.pdf. 4. www.fsa.gov.uk/pages/Library/Other_publications/Miscellaneous/2008/nr.shtml 5. Chart 5.4 on page 80 of the CP. 6. www.fsa.gov.uk/pages/Library/Communication/PR/2008/028.shtml Back to contents |
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