1. The Building Societies Association (BSA) represents mutual lenders and deposit takers in the UK including all 47 UK building societies. Mutual lenders and deposit takers have total assets of over £375 billion and, together with their subsidiaries, hold residential mortgages of £245 billion, 20% of the total outstanding in the UK. They hold more than £250 billion of retail deposits, accounting for 22% of all such deposits in the UK. Mutual deposit takers account for 31% of cash ISA balances. They employ approximately 50,000 full and part-time staff and operate through approximately 2,000 branches.
2. The BSA welcomes the opportunity to respond to CP 12/24 (the CP), which consults on changes to certain existing regulatory rules as a result of the move towards twin peaks regulation.
3. The BSA supports the broad approach, described in paragraph 1.4 of the CP, of making only changes that are required to implement the Financial Services Bill amendments to the FSMA and support the new (dual regulator) regulatory structure. The simple ‘designation’ of Handbook provisions either to the Prudential Regulatory Authority (PRA) or the Financial Conduct Authority (FCA), depending on the context, is sensible.
4. We note that, however, as explained in paragraph 1.6, certain more substantive changes are also required (notably, in GEN 4-5, and SUP 5, 8 and 18) and we comment on those below. We also note (paragraph 1.15) that, because the Financial Services Bill was still going through Parliament at the time the CP was written, late amendments to the Bill might necessitate further regulatory changes requiring additional consultation.
5. In certain chapters there is specific information about transitional provisions, but in others the CP notes that details will be given before legal cutover. On a broad point, we hope that the regulators will be as generous as is practicably possible in respect of transitionals, in the light of the considerable work that the move to twin peaks will mean for firms and their systems.
Chapter 2: General Provisions – GEN 2
(Questions 1 and 2)
6. We support the reason for including new explanatory material in GEN - ie, as explained in paragrpah 2.4, to make it clear that identical provisions in the PRA and FCA Handbooks must be interpreted as applying only to the extent that they are within each regulator’s powers. Therefore, for example, SYSC 6.1.1R (requirement on a firm to maintain adequate policies and procedures to ensure compliance with regulatory requirements) is qualified in the context of each regulator. The respective examples (FCA – BCOBS; PRA – BIPRU) are useful and get the point across effectively. The definitional proposals (Appendix 19) seem sensible.
Chapter 3: Regulatory Disclosure and Logos – GEN 4/5
(Questions 3 – 5)
7. This chapter contains proposals for some substantive changes. As noted in paragraph 3.3, firms will continue to be required to disclose which body authorises and regulates them and ‘FSA’ will be naturally replaced by ‘FCA’ and/or ‘PRA’ as appropriate. The proposed status disclosure provisions, set out in Appendix 1, are technically correct but represent overkill in terms of the number of words – our members will all be dual regulated, so the disclosure in 4 Annex 1AR on page 12 of Appendix 1, would apply – “Authorised by the Prudential Regulatory Authority and regulated by the Financial Conduct Authority and the Prudential Regulatory Authority”. The statement would go from (the current) seven words to eighteen. As the FCA contributes to the authorisation process, would it be possible to use the following – “Authorised and regulated by the Prudential Regulation Authority and Financial Conduct Authority”? (twelve words). “By current standards, the proposal in the CP is a comparatively very long regulatory status disclosure and, if a shorter version is not adopted, we hope that the regulators will take this into account and be proportionate in respect of matters like font size and prominence.
8. The Association has no strong views on the withdrawal of the use by firms of the regulator’s logo. We can see how use of the logo by regulated firms might be open to misunderstanding. We are inclined to agree that the use of the logo does not give rise to significant benefits over and above normal regulatory status disclosure. The continuation of the licence to use the key facts logo seems sensible for the reason given in paragraph 3.8.
9. As with any similar changes, transitional periods are very important from a practical point of view for regulated firms. We regard six months as the minimum practical period – 9 months would be better given all the other regulatory changes that firms and their systems will have to cope with over the forthcoming year or more.
Chapter 4: Reports by Skilled Persons – SUP 5
10. The BSA has previously expressed some reservations about the proposals in respect of skilled persons’ reports, but we naturally recognise that the CP must make preparations for changes approved by Parliament. Under the Financial Services Bill both the FCA and the PRA will inherit the FSA's ability to use section 166 reports.
11. We have noted the FSA’s increasing scope and extent of the use of section 166 of the FSMA to demand these reports on more day-to-day matters, even in circumstances where there is no evidence of any wrongdoing on the part of the firm. While we recognise that this move reflects the regulator's commitment to a more intrusive approach to financial services regulation, such tools should be used appropriately and proportionately. Our response to the Joint Committee on the Draft Financial Services Bill questioned the use of this third party reporting to, for instance, verify regulatory returns.
12. The BSA is concerned that such reports are proving extremely costly (£31million in 2011/12) and that the effect of using section 166 at present is to shift significant regulatory costs from the FSA itself (as the firm has to pay for the report), and thus - in effect - conceal them. We argue that the total burden of regulatory costs can neither be controlled nor scrutinised while this indirect route is used.
13. Therefore, we believe that the regulators must be scrupulous in using the new powers appropriately and proportionately, and should be transparent about process matters such as the selection of skilled persons (including relative costs); arrangements for consultation with firms in respect of their particular businesses; processes for assessing the suitability of subject matter for section 166 reports; procedures for addressing potential conflicts of interest; and measures to ensure regulatory accountability regarding the number, scale etc of such reports. We appreciate that these are probably matters more relevant to the proposed consultation on regulatory transparency (early 2013) than to the current CP, but nevertheless worth noting at this stage.
Chapter 5: Applications to Vary and Cancel Part IV Permissions – SUP 6 (Question 7)
14. We note paragraph 5.4) that, from legal cut-over, a dual-regulated firm will need to apply to the PRA to cancel its Part 4A permission and presume that the PRA will write to firms reminding them of this requirement?
15. The BSA acknowledges and supports the sensible requirement, referred to in paragraphs 5.12 - 14, for the PRA and the FCA to consult each other in relation to the varying or cancelling of a permission or the imposing of a new requirement. It is sensible for each regulator to be responsible for its own threshold conditions (paragraph 5.15), which we believe will be subject to the over-arching statutory requirement for co-ordination.
16. It is useful for our members to have the summaries of key Handbook changes relevant to all firms and to dual-regulated firms contained in chapter 5.
Chapter 6: Waiver and Modification of Rules – SUP 8
(Questions 8 and 9)
17. We note and welcome the fact – confirmed, for example, in the Journey to the FCA document and in chapter 10 of the CP - that GABRIEL and the Online Notifications and Application system (ONA) will continue, but note (from paragraph 6.7) that ONA will not be available for waiver applications after legal cutover.
Chapter 7: Controllers and Close Links - SUP 11
(Questions 10 and 11)
18. The BSA has no comments on these proposals.
Chapter 8: Passporting and Related ssues – SUP 13A, 14 and Appendix 3
(Questions 12 – 16)
19. The BSA has no comments on these proposals.
Chapter 9: Notifications – SUP 15
20. These proposals seem sensible and proportionate. The table in paragraph 9.10 is a useful summary of notifications by dual-regulated firms.
Chapter 10: Various Reports - SUP 16
21. We note that the Bill does not specify a new process for notifications but some clarification is required to accommodate twin peaks. The BSA strongly welcomes the continuation of GABIEL and ONA, and supports the proposal (in paragraph 10.6) to consult if any changes to other submission methods are to be proposed.
22. The table, in paragraph 10.8, listing the appropriate regulator in respect of various reports, is useful.
Chapter 11: Transfers of Insurance Business – SUP 18
23. The BSA has no comments because this area is not core to our members’ business activities.
Chapter 12: Other Changes to the PRA and FCA Handbooks
24. The approach to the new regulatory Handbooks is summarised in the introduction to the CP and, as noted above, the BSA supports the proposed approach.
25. Paragraphs 12.5 – 6 of chapter 12 usefully identify Handbook provisions that will not be carried forward after legal cutover and see no problems with what is planned in this tidying-up exercise.
26. We note that the Complaints Against the FSA (COAF) material will be published outside the Handbook after consultation. We have no objection to this in principle, provided the provisions are not watered down. We also note the modules that will not be included in the PRA Handbook (paragraph 12.8).
27. The proposals regarding changes to actions for damages appear to be sensible and proportionate.
Appendix 1: Cost Benefit Analysis
(Questions 23 – 24)
28. As noted above, the BSA has concerns that – unless applied with great care – the costs of skilled persons reports, under the new regime, could be disproportionate to their benefits.
29. We agree that the costs to mutual societies appear to be no greater than the costs for other dual-regulated firms (paragraphs 34-35).