FSA CP 12/37: The Financial Services Bill: Implementing market powers, decision making procedures and penalty policies


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 certain aspects on CP 12/37 (the CP), but most of the CP is of little relevance to the majority of our members. Therefore, we focus on chapter 6 (Decision Procedures and Penalties), parts of which are material to all regulated firms. 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. Broadly, the BSA is content with the proposals in the CP but has concerns about the proposed withdrawal of the requirement on the regulator to issue a supervisory notice if it exercises its own-initiative power to vary a firm’s Part IV permission (see response to question 16 below).

4. The BSA is also examining a related consultation (CP 12/35) on the FCA’s use of temporary product intervention rules. We note that there is a separate consultation in relation to PRA enforcement (CP 12/39), which we are also considering.

Decision Procedures and Penalties (Chapter 6)

  • General

5. We note the material relating to decision-making procedures and penalty/suspension policies, which are requirements of the FSMA as amended by the 2012 Act.

6. Questions 10 – 14 all relate to sponsors and, because they are to do with market matters that have little direct relevance to most of our members, we provide no comment.

  • Disciplinary powers

7. With regard to qualifying parent undertakings, we note that whilst 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 have commented on questions concerning qualifying parent undertakings in the response to the FSA’s Journey to FCA consultation and in response to FSA CP 12/34. We are also considering the more recent consultation on a draft policy statement by the Bank of England and the FSA entitled Power of direction over parent undertakings by the PRA.

Question 15: Do you agree that the RDC should decide whether to exercise these new disciplinary powers?

8. In response to question 15 in the CP, we strongly endorse the proposal that the Regulatory Decisions Committee (RDC) should decide whether to exercise the new disciplinary powers. We believe that this would be a sensible governance safeguard.

  • Own-initiative requirement power

Question 16: Do you agree with our proposals regarding decision-making for own-initiative variations of permission and own-initiative requirements?

9. As noted in paragraph 6.25 of the CP, the relevant new powers are based on those already set out in section 45 FSMA (a new section 55L is introduced by the 2012 Act), but a new, separate own-initiative power for dealing with ‘requirements’ is included. Paragraphs 6.26-7 confirm that the safeguard concerning the RDC’s involvement regarding ‘fundamental changes’ will remain, and we support this decision.

10. However, the CP proposes the withdrawal of the requirement on the regulator to issue a supervisory notice if it exercises its own-initiative power to vary a firm’s Part IV permission. We recognise that, as stated in paragraph 6.27, only certain regulatory measures require the issue of a supervisory notice, but we question why one is not deemed to be appropriate in this particular case. Paragraph 6.27 indicates that it is because “The own initiative requirement power is likely to play a significant part in achieving success in the FCA’s early intervention strategy.”

11. The BSA strongly supports early intervention where it is appropriate and proportionate. As we stated in our response to Journey to the FCA

“Strong, effective regulation (which the Association supports) does not require the dismantling of, or impairing, reasonable mechanisms for firms to be able to challenge regulatory decisions (which the Association would oppose) and we believe that it would be counter-productive to reduce such safeguards.”

Similarly, leaving the decision as to whether or not to issue a supervisory notice to FCA staff (except in fundamental change cases) - new DEPP 2.5.7-8G (in Appendix 5 to the CP) – represents the potential omission of an important accountability mechanism and safeguard.

12. Supervisory notices include details of the action, the effective date, the reasons for the action, and the firm in question’s rights in respect of the matter. We appreciate that the process involves a time element and that this might not always be conducive to interventionist regulation, but the subject matter of the action could be very significant for a firm and the proposals sit very uneasily with the absence of both a supervisory notice and RDC involvement (especially in a new ‘pre-publication’ environment).

13. Therefore, for the reasons given, we have concerns about the proposal set out in question 16 and urge the FSA to reconsider whether its proposals in this area represent a reasonable compromise between strong regulatory action and accountability/fairness to firms. We believe that more detailed discussion with interested parties is needed on this matter.

  • Financial promotions rules: directions given by FCA

14. As noted above, the BSA is considering CP 12/35 (relating to the FCA’s use of temporary product intervention rules), which concerns substantive issues and, especially as the deadline dates on two CPs are so close, we will not repeat our comments in respect of CP 12/35 here, but instead limit our response to question 17.

Question 17: Do you agree that FCA staff under executive procedures should decide whether to exercise the financial promotions directions power?

15. Taking into account the rationale set out in paragraph 6.32 and, in particular, noting that a supervisory notice will have to be given (paragraph 6.31), we are broadly content with the proposal.

  • Authorisation of dual-regulated firms

Question 18: Do you agree that FCA staff under executive procedures should decide whether to refuse consent to the PRA in respect of applications for permission, variation and approval in relation to dual-regulated firms at both the warning notice stage and the decision notice stage?

16. All BSA members will be dual-regulated by the FCA and the PRA. As noted above, the BSA is examining the consultation in relation to PRA enforcement (CP 12/39), which has a later deadline at the end of February 2013. Therefore, we defer comments for further consideration and inclusion in that response.

  • Publishing information about warning notices

Question 19: Do you agree with our proposed amendments to DEPP 3?

17. The BSA has commented in previous responses about the new pre-emptive powers, especially pre-publication of warning notices, and (while supporting the introduction of stronger powers) has urged caution in the use of them, in order to avert a presumption of guilty until proven innocent. We believe that the new DEPP 3 provisions (in appendix 5 to the CP) set out the new arrangements, including the RDC’s involvement, clearly and fairly.

  • Penalty and suspension policies

Question 20: Do you agree with our proposal to apply the existing penalties and suspensions policies in DEPP to the FCA’s new disciplinary powers?

18. Because the proposal represents the application of existing policies to the new disciplinary powers, we have no objection in principle. However, it again needs to be borne in mind that some of the new powers are of a pre-emptive nature and we repeat the point we have made before that great care needs to be taken in their exercise in order to avert a presumption of guilt, the effects of which may be very difficult to remedy if it subsequently transpires that the firm in question had done no wrong.

The Building Societies Association
30 January 2013