The Final Report 'Changing banking for good' is the fifth report of the PCBS to consider professional standards and conduct in the UK banking sector.  The recommendations contained within the report are made with the objective “to enable trust to be restored in banking” in light of past banking scandals.

The report makes recommendations in five areas: i) making individual responsibility in banking a reality for senior management; ii) reforming governance within banks to reinforce each bank’s responsibility for its own soundness and standards; iii) creating better functioning and more diverse banking markets; iv) reinforcing the responsibilities of regulators in the exercise of judgment; and v) specifying the responsibilities of this and future Governments.

Among other things, the report recommends “a new framework for individuals” to replace the Approved Persons Regime, changing remuneration standards and heightening expectations on, and sanctions for, the failures of individuals and increasing the competitiveness within banks.  Aside from these, the report also makes a number of recommendations in the areas of corporate governance, auditing and accounting. 

Corporate Governance recommendations

The Final Report comments “the financial crisis, and multiple conduct failures, have exposed serious flaws in governance”.  The report then goes on to say:

Poor governance and controls are illustrated by the rarity of whistle-blowing, either within or beyond the firm, even where, such as in the case of Libor manipulation, prolonged and blatant misconduct has been evident.

 The major recommendations in the area of corporate governance are: 

• Each individual director should have a personal responsibility for the “safety and soundness" of the firm and the Companies Act 2006 (section 172) should be amended to prioritise financial safety over shareholder interest in the case of banks.  The report highlights that the Financial Reporting Council (FRC) should amend the UK Corporate Governance Code in this respect.
• The Chairman of the Board should be personally responsible for the effective operation of the board, with the Senior Independent Director being responsible for making sure that this happens. A named non-executive director should be responsible for overseeing fair and effective whistle-blowing procedures. 

Auditing and Accounting recommendations

The Final report comments:

While we recognise the risk of ever more complex and burdensome accounting requirements, flaws in IFRS mean that the current system is not fit for regulators’ purposes. 

The major recommendations in the areas of auditing and accounting are:

• Banks should prepare a separate set of accounts for regulators on the basis of specified prudent principles set by the Prudential Regulation Authority (PRA).  These accounts will be externally audited and a statutory duty to regulators will be placed upon auditors.  Where there is a public interest for these accounts to be published the PRA will have the power to require that these prudential accounts, or an abbreviated form, may be included in the annual report with a reconciliation to the IFRS numbers.
• Audit reports on banks should include specific commentary on valuation, risk and remuneration, amongst other key judgement areas.
• Auditors of banks should meet regularly with the PRA and the Financial Conduct Authority (FCA) – and more often than the once a year required by current Codes of Practice. Representatives of the audit profession should also have the opportunity to discuss emergent issues that have arisen from their work with banks, the PRA, the Financial Reporting Council (FRC) and HMRC.
• The PCBS recommends that the FRC should push for an early decision on the introduction of the expected loss model for loan loss provisioning.  The PCBS noted that they were concerned about the length of time that the profession was taking to move the basis for valuing debt assets to an expected loss model.

The FRC supports the recommendations of the PCBS.  However they raised concerns over the recommendation to amend the Companies Act 2006 to prioritise financial safety over shareholder interest in the case of banks and comment that this may not be the correct solution.  The FRC comment:

The UK and Europe will be at a competitive disadvantage if its regulatory arrangements are too heavily swayed toward safety at the expense of capital attraction.

The FRC also note:

An amendment to the Companies Act to remove shareholder primacy could have a profound bearing on investors’ willingness to commit capital and might set precedents for other sectors.  It should only be undertaken after detailed and rigorous consultation so that we can assess and understand the impact this might have on the operation of the UK equity markets. It should be remembered that the concept of enlightened shareholder value which is enshrined in the Act was introduced on the basis of a consensus reached after wide public debate. Any changes to the Act should be equally well thought through.   

In relation to the recommended separate set of externally audited regulatory accounts, the FRC commented that it expects to be involved together with the PRA and FCA in the setting and implementing of standards and guidance.  The FRC also note that it has recently revised UK and Ireland auditing standards for auditors of companies who are required to comply with the UK Corporate Governance Code (including banks) which partially addresses the recommendation regarding disclosure of risk in the auditors’ report. 

The UK government has endorsed the principal findings and has stated that it intends to implement the Parliamentary Commission's main recommendations to address the failings that the Parliamentary Commission identified on individual accountability, corporate governance, competition and long-term financial stability.

Click for:

Full report (link to UK Parliament website)

FRC press release (link to FRC website)

Government response (link to government response)