1. The Building Societies Association (the 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 is pleased to provide comments on CP12/34 (the CP), which consults on proposed changes to the regulatory requirements to create new rulebooks and policies for the Prudential Regulatory Authority (PRA) and the Financial Conduct Authority (FCA). The CP refers to the Financial Services Bill but, since the CP’s publication, the Bill has received Royal Assent and is now the Financial Services Act 2012 (the 2012 Act).
3. The BSA responded in detail to the FSA’s consultation paper Journey to the FCA (see link below) which covered a wide range of topics some of which are also relevant to the CP. Therefore, we try to keep repetition to a minimum in this response.
Changes to the Supervision Manual (SUP 1): The FCA approach to supervision (Chapter 2)
Question 1: Do you have any comments on how we propose to cover the FCA’s new supervisory approach in the revised SUP 1?
4. The proposed revisions to Chapter 1 of the Supervision Manual (SUP 1) appear to be accurate and proportionate, adequately reflecting agreed policy against the background of the FCA’s key obligations prescribed by the FSMA as amended by the 2012 Act.
5. We note the proposed guidance (SUP 1A.3.6), which sets out the FCA’s view that it would generally be inappropriate for firms to disclose their FCA risk assessment to third parties, except for external auditors etc. We also note from paragraph 185 of the most recent PRA approach document (October 2012) that there are complications in relation to EU legislation about the disclosure of a firm’s Product Intervention Framework stage and we presume that implications, if any, for the FCA side of things have been worked through.
Changes to the Supervision Manual (SUP 7): Individual requirements (Chapter 3)
Question 2: Do you have any comments on our proposals to amend SUP 7?
6. The proposed amendments to SUP 7 relate to a range of regulatory powers referred to in section 11 of the 2012 Act that, among other things, introduces new sections 55J to 55Y into the FSMA. The relevant powers include variation/cancellation of permissions, imposition of requirements, prohibitions and restrictions etc. The changes appear to be largely of a routine nature, reflecting the move from the FSA to a new ‘twin peaks’ regulatory regime and, in the particular context of the CP, the FCA. Therefore, the BSA has no detailed comments on this chapter.
7. We note that paragraph 3.12, concerning transitional provisions, refers to HM Treasury’s consultation on draft secondary legislation. The BSA also responded in detail to that consultation (see link below), including the question on transitional provisions, which by and large we considered to be appropriate. We noted that it was important to our members that they should have a clear statutory basis for the assumption that information or documents provided to the FSA before cut-over do not need to be copied to the PRA.
Changes to the Threshold Conditions sourcebook (COND) (Chapter 4)
Question 3: Do you agree the COND Sourcebook should be retained in the FCA Handbook?
8. We agree that the COND Sourcebook should be retained for the reasons given in paragraph 4.15 of the CP.
9. The BSA’s response to HM Treasury’s consultation on draft secondary legislation (see above) contains comments on the proposed changes to threshold conditions. In the context of the FCA, we expressed some concerns about how the ‘effective supervision’ threshold condition would work in practice.
Question 4: Do you agree with the amendments to COND as set out in the Instrument at Appendix 5?
10. As explained in paragraph 4.17 of the CP, this appears to be mainly a tidying-up exercise and, as such, seems to be appropriate.
Question 5: Do you agree that the Instrument sufficiently draws the distinction between the guidance that applies to dual-regulated firms and that which applies to FCA-only regulated firms?
11. The ‘Application’ section in the Instrument at Appendix 5 to the CP seems reasonably clear on this aspect.
Question 6: Do you have any comments on the proposed guidance to the new Business Model TC?
12. As noted in paragraph 4.20, the guidance on the business model Threshold Condition is the only significant new guidance to be added to COND. BSA members are all of very long-standing in their core areas of business and therefore we take comfort from the statement in paragraph 4.21 that “the revised TCs, which now include a specific business model TC, make explicit what is already implicit and as a result we believe our new business model guidance reflects existing practice.”
13. The matters that firms should consider (set out in paragraph 2.7.8 of the Instrument at Appendix 5 t the CP) appear to be reasonable and appropriate. However, because the relevant requirements are explicit for the first time, we hope that the FCA will be patient in allowing firms sufficient time to be able to marshal their relevant metrics into communicable form.
FCA powers over qualifying parent undertakings (Chapter 5)
Question 7: Do you have any comments on our draft statement of policy on using the power of direction?
14. Although a building society is always at the apex of any group, and cannot therefore have a parent undertaking, the BSA has two members that are banks owned by industrial and provident societies. We therefore agreed with the general approach outlined in paragraph 5.4 of the HM Treasury consultation document (referred to in paragraph 5.9 of the CP), noting that it was key that the safeguard in relation to parent undertakings whose main business was not related to financial services was included -
“To limit the powers of direction to parent undertakings whose main business is related to financial services, the Bill provides that the powers may only be exercised in relation to parent undertakings of certain authorised persons, recognised investment exchanges or recognised clearing houses if the parent undertaking is a financial institution of a prescribed kind. This safeguard helps keep the power within acceptable bounds and ensures that the financial services regulators will not have powers of direction in relation to parent undertakings whose main business is not related to financial services.”
This is an important safeguard for parent undertakings, the main business of which is not financial services.
15. The BSA agrees with the comments in paragraphs 1.24-1.25 of the CP on the potential impact on mutual societies.
The Building Societies Association
28 January 2013