Industry response

Our response to the joint consultation, Strengthening accountability in banking: forms, consequential and transitional aspects, FCA CP 14/31 and PRA CP 28/14

Introduction

This consultation sets out the consequential changes, transitional arrangements and forms following the first consultation in July 2014.  We note the proposals in this consultation may be subject to change (as happened on 23 February 2014).  This uncertainty is clearly unhelpful, if unavoidable given the regulators’ decision making processes and timetable.  We welcome the publication of the forms as they set out regulatory expectations and our useful for our members.

Q1: [PRA and FCA]: Do you agree with the proposed approach to grandfathering existing approved persons into Senior Management Functions?

We agree. 

Q2: [PRA and FCA]: Do you agree with the regulators’ proposed Statement of

Responsibilities template and the Significant Change of Responsibilities form?

We agree that key areas of responsibility should be allocated to senior managers.  Best practice dictates this should occur anyway.  We welcome in principle the supporting templates and forms.  They should enable the regulator to see at a glance who is responsible for what.  A degree of uniformity ensures the regulator can make comparisons across peer groups.

PRA

In our response to the initial consultation, we argued that the list of 20 prescribed responsibilities (in practice, a maximum of 19 for building societies as none carries out proprietary trading) was appropriate for a large, complex firm.  It was less so for a mutual. 

It is not possible, practical, or even desirable for SMFs in smaller firms to have the same level of direct involvement in multiple prescribed responsibilities as SMFs in large firms.  In many cases, all direct responsibility in some areas of a smaller firm is in practice undertaken by an individual less senior than an SMF.   In our response last year, we urged the PRA to explicitly acknowledge the difference in the scale of firms and to make clear that SMFs will be required to have a level of oversight for their prescribed responsibilities appropriate to the size and business model of their firm. 

At a meeting with PRA officials in late December 2014, we were encouraged to consider which prescribed responsibilities were less relevant for building societies, particularly smaller ones.  We have done that and list below those prescribed responsibilities we regard as less meaningful:

PR 9. allocation of all prescribed responsibilities.

While PRA will want to ensure nothing is overlooked, once a responsibilities map is in place, nothing more is needed unless someone moves.

R 10. leading the development of the firm’s culture and standards in relation to the carrying on of its business and the behaviours of its staff.

11. embedding the firm’s culture and standards in relation to the carrying on of its business and the behaviours of its staff in the day-to-day management of the firm.

"Culture" is more a larger firm issue and arguably of less relevance to smaller societies.

PR 12. development and maintenance of the firm’s business model.

Smaller societies do not have the kind of business model that this PR is targeted at.

PR 16. the firm’s recovery plan and resolution pack and overseeing the internal processes regarding their governance.

The PRA already had a requirement in place for a board level person to take responsibility for the RRP, even before this new regime came long.  Moreover, smaller, simple societies have simple RRPs.  They therefore should not have to update them more than every two years.  Since they do not have to supply phase 2 resolution information, there is a case for not making this a prescribed responsibility for them.

Q3: [PRA]: Do you agree with the PRA proposed approach to applications and notifications for persons in scope of the senior managers’ regime?

We agree.

Q4: [PRA]: Do you agree with the PRA’s proposed revised approach to receiving notifications of Conduct Rule breaches, including Form L?

This is a major area of concern for us.  We are strongly opposed to the new proposal for a seven business day deadline for reporting breaches/ suspected breaches by certification staff.   It goes much further than envisaged by the Parliamentary Commission on Banking Standards and the Banking Reform Act, and risks undermining the success of the fundamental objectives of the senior management part of the exercise.

Some of the key problem areas of the seven day deadline are outlined below:

  • proper investigations take time.  To discuss the matter with relevant staff, document those discussions and review all the available evidence will take considerably more than seven business days.
  • it may take more than seven business days to establish “reasonable grounds” to believe or suspect that a breach has occurred (see above).
  • what if the staff member in question is unavailable, for example out of the country, off sick, at the point in time when the firm is first alerted to the possibility of something being wrong?
  • regarding verbal notifications (see above), how are firms to act should the supervisor be uncontactable, for example, out of the office or on leave?
  • what is the PRA’s views on the potential HR and employment law issues? (see below)

Reporting has become problematic.  The seven business day deadline for reporting breaches/ suspected breaches could lead to serious unintended consequences such as massive under reporting.   We would like the regulators to spell out how they will ensure consistency in regulatory breach reporting. 

HR and employment law issues

Alongside reporting, this is a major area of concern.  To help building societies develop the most appropriate framework, we believe the regulators should issue advice on the following:

  • vetting for fitness and propriety.  Relevant particularly to SMFs and certification staff.
  • references.
  • individual v firm accountability.
  • practicalities of probationary time limits.
  • how “responsibilities maps” align with relevant job descriptions and contracts.
  • disputes over contracts of employment, certification refusals/ withdrawals etc.
  • implications for directors’ and officers’ liability insurance/ indemnity.
  • records, reporting and notifications to the regulator. Note the 7-day reporting requirement regarding senior managers and certification staff breaches/suspected breaches.
  • relevance of disciplinary records and conduct in private life.  In terms of fitness and propriety, reviewing, regulatory reporting etc.
  • training.
  • disciplinary procedures. 
  • accommodating job sharing into the new arrangements.
  • remuneration.
  • changes to existing contracts.

FCA

While all firms must, of course, treat customers fairly, the FCA should prioritise those firms where the greatest risk lies, and the senior individuals within them, and those that consistently breach the conduct rules and principles, rather than imposing a blanket approach, which might largely prove to represent form over substance. 

While we strongly support the main principles in the FCA's (and the PRA's) proposals, subject to certain important points of clarification that the BSA has already relayed to the regulators, there is one aspect of the FCA's proposals about which we have severe misgivings.

Most of the content of the July joint consultation was signalled through the PCBS and the legislation, but the FCA’s proposal for a very wide extension of the conduct rules to sub-certification employees (ie all other employees except ancillary staff) is new.  The proposal seems inconsistent with the principle of systematic regulation, is potentially very costly and bureaucratic, and could have unintended counter-productive consumer outcomes.  If "standard" NEDs are to be removed from the SMR regime and conduct rules as now proposed, it would strike a very discordant note indeed if the FCA were to continue with its plans regarding conduct rules and junior (ie sub-certification) staff – junior staff did not sit on the boards of firms that failed: NEDs did.

What the July 2014 consultation proposes could take us back to the box-ticking yet fundamentally ineffective regulatory approach of the past.  It certainly would not be proportionate or systematic.  While all firms must of course treat customers fairly, the FCA should prioritise those firms where the greatest risk lies, and the senior individuals within them, and those that consistently breach the conduct rules and principles, rather than imposing a blanket approach, which might largely prove to represent form over substance. 

We explained these points in detail in our last response and in correspondence with the FCA.  A key point is that currently, junior staff are encouraged to admit mistakes.  This is a constructive part of their training and leads to good customer outcomes.  If the FCA proposal goes ahead in its current form, constructive compliance of this kind will be dead.

Q5: [FCA]: Do you have any comments on the FCA’s proposed form for quarterly notifications of conduct rule breaches and disciplinary action for FCA certification employees and other conduct rules staff (Form H)?

No

Q6: [FCA and PRA]: Do you have any comments on the proposed Application for variation of a conditional approval form, or the proposed Grandfathering notification form?

No

Q7: [PRA & FCA]: Do you agree with PRA and FCA’s proposed approach to Forms as set out in this Chapter?

Broadly speaking, yes.  But we do consider the forms could be simplified.

Q8: [FCA]: Do you have any comments on the FCA’s proposed consequential Handbook changes, or think more are needed?

No.

Other points

1. While much of the content of the proposals is already best practice, and therefore part of building societies’ BAU, some sections are new and far-reaching.  We therefore suggest that the proposals are introduced on a graduated basis, with systemic institutions – some of which caused the financial crisis – being the first to implement these proposals.   In any case, building societies need a minimum of a year to start making the necessary changes.

2. We are concerned at the way in which the regulators’ proposals are being published.  To date, there have been three sets of consultations (this is the second) with no sign of a full policy statement on the first consultation that was published in July 2014.  It is hard to provide definitive comment on subsidiary elements when we are unsure of the direction of travel of the main policy.

3.  One element that has changed forms, in fact, part of the third consultation.  This is that "standard" non-executive directors should be excluded from the senior management regime.  “Standard” means not the chairman, the senior independent director, or chairs of risk, audit, remuneration or nomination committees.

If agreed, “standard" NEDs would not be subject to any of the following:

  • pre-approval by the PRA or the FCA.
  • the requirement for an individual statement of responsibility.
  • any of the Conduct Rules.
  • the presumption of responsibility; or
  • the new criminal offence under section 36 of the Banking Reform Act.

If "standard" NEDs are to be removed from the SMR regime as now proposed, it would strike a very discordant note indeed if the FCA were to continue with its plans regarding conduct rules and junior (ie sub-certification) staff.

About us

The Building Societies Association represents all 44 UK building societies. Building societies have total assets of over £330 billion and, together with their subsidiaries, hold residential mortgages of over £240 billion, 19% of the total outstanding in the UK. They hold over £240 billion of retail deposits, accounting for 19% of all such deposits in the UK. Building societies account for about 28% of all cash ISA balances. They employ approximately 39,000 full and part-time staff and operate through approximately 1,550 branches.

 

Andrea Jeffries

2 March 2015