Summary of the BSA's Views

10.    The BSA supports the broad objectives of the CP, but cautions against hurried changes, especially those of an extensive nature or dealing with complicated matters (such as the 'special resolution regime').  However, whatever the outcome of the CP, banks and building societies should be subject to the same legislative arrangements (any necessary changes being made eg to reflect their different corporate forms).

11.    The CP raises such a large number of complicated questions, and touches upon so many potential courses of action that could have unforeseen consequences, that the BSA regards it as extremely important that further, detailed work is undertaken - where appropriate - before proceeding to legislation.  An arrangement like the Joint Committee on Financial Services and Markets, chaired by Lord Burns before the Financial Services and Markets Bill, might be a suitable apparatus. As Howard Davies said in 2003 –

"That pre-legislative scrutiny certainly added value, and teased out a number of complex issues which would have otherwise detained Parliament, and would have been more difficult to deal with in the traditional confrontational style of Westminster 2."

12.    While the FSMA was, of course, a very long and highly significant piece of legislation, any legislation arising from the CP could have implications at least as serious as the FSMA, and in our view needs - as a minimum - the same level of pre-legislative scrutiny to avert unforeseen, and possibly very serious, detrimental consequences.

13.    In relation to recent and current events – and ongoing supervision - it is very important that the FSA does not mechanistically impose particular 'solutions' (eg a specific level of liquidity) on firms – an appropriate degree of individual firm discretion should be maintained during this period of uncertainty.  To impose a straightjacket on firms will reduce their flexibility and could lead to wider problems for the housing and mortgage markets.  This is particularly important in view of the fact that the FSA does not expect its move towards principles based regulation to be affected by the current situation – excessive prescription in relation to liquidity might unbalance the PBR agenda.

14.    The following paragraphs summarise the BSA's views on the proposals set out in the CP -

(i)   Both the Treasury Committee Report 3 and the CP recognise that the fundamental responsibility for financial stability of a firm rests with the firm's Board.  The BSA agrees with this proposition, which applies equally to other financial institutions.  But the BSA also believes that, however many procedures are put in place, there is unlikely to be a serious regulatory bulwark against financial instability unless the Authorities are fully committed in practice to carrying out their existing functions in seeking to avert such financial instability. Paragraphs 9 – 27 of the FSA's internal audit report graphically underline this point; at paragraph 27, it stated –

"We cannot provide assurance that the prevailing framework for assessing risk was appropriately applied in relation to Northern Rock, so that the supervisory strategy was in line with the firm's risk profile."

(ii)   The BSA supports the CP's broad objectives and believes that many of the proposals in the paper are sensible in principle, notably –

• additional work to improve stress testing
• co-operation with international partners on –
  • stress testing and risk management
  • liquidity regulation
  • consistent valuation and disclosure regarding asset backed securities
  • credit rating agencies
• extra requirements regarding information to the FSA, provided they are proportionate, necessary and subject to cost-benefit assessment
• better payments systems oversight, but limited to what is strictly necessary
• limited delay in disclosure of emergency liquidity assistance
• new arrangements regarding Bank of England immunity and security, provided drawn only as widely as is absolutely necessary
• modest changes, in respect of building societies, concerning Bank of England funds, floating charges, access to liquidity and rescue tools (some of which are already before Parliament in the draft Building Societies (Financial Assistance) Order 2008).

However, it is important that any changes do not have a disproportionate effect on smaller institutions; for example, if smaller firms had to bear the costs of changes without benefiting from them.

(iii)   The BSA does not believe that a substantial case is currently made for radical changes, such as the introduction of a special resolution regime or pre-funding of the Financial Services Compensation Fund.  While we shall, of course, consider all recommendations carefully and co-operate fully in this important work, we believe that a proportionate approach, before deciding whether or not to introduce radical, complicated or potentially far-reaching changes, would be to –

• examine, and if appropriate move ahead with, some of the more modest changes in proposed in the CP - see (ii) above
• await the results of the FSA's supervisory enhancement programme (although we recognise that this is likely to be a matter of judgment, rather than fact), and
• investigate practical ways to improve speed of payment from the FSCS.