The report (link to UK Parliament website) made 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.  Many of the recommendations were aimed specifically at the Bank of England (including the Financial Policy Committee (FPC) and the Prudential Regulation Authority (PRA)) and the FCA.

Among other things, the report recommended: 

• “A new framework for individuals” to replace the Approved Persons Regime.   

The FCA comment that they “support the creation of a Senior Persons Regime” and have highlighted in their response what they expect the key features of such a regime to contain.  Such features would include pre-approval by the regulator of any individual before they take up their role, acceptance by Senior Persons of their role and responsibilities in a written statement and handovers when Senior Persons leave or pass on duties.  

The Bank of England is also supportive of these proposals and has commented that they “expect to consult on the design of the new regime and enact the final rules in 2014, ahead of implementation in 2015”.  They also note that the PRA will ensure that key activities and key risks of firms are assigned to individual Senior Persons including the Chief Executive Officer. 

• Changing remuneration standards.   

The FCA “support the Commission’s wider recommendations on remuneration, including the benefits of flexibility in firms’ choice of instruments and the development of legal and contractual arrangements to allow deferred remuneration to be recouped in a wider range of circumstances”.  They note that they will “work with the PRA” on whether changes are required to the Remuneration Code in 2014.  However they do not agree that the remuneration code should be extended beyond “Material Risk Takers”. 

• Heightening expectations on, and sanctions for, the failures of individuals and increasing the competitiveness within banks.   

The FCA agrees with extending the time limit between the regulator learning of an offence and taking enforcement action against individuals from three to six years.  The FCA also support the proposal that Senior Persons must show that they “took all reasonable steps to prevent or mitigate the effects of a specified failing” in the event of successful enforcement action. 

Additionally, the report made a number of recommendations in the areas of corporate governance, auditing and accounting.  

• Corporate Governance 

The FCA agrees with the PCBS recommendations that the “Board’s must be responsible for managing the risks within their organisations” and agree that “the chairman and non-executive directors require access to independent advice and expertise to provide effective challenge to the executive”.  The FCA has, however, expressed concern that “overly prescriptive regulation” may lead to a “tick-box” approach to corporate governance.  The FCA also supports the whistleblowing recommendations of the PCBS report and comments that they will consult in 2014 on “whether additional rules are needed to set minimum standards for whistleblowing”. 

The Bank of England agrees with the PCBS recommendations on governance and risk management and will consult on these in 2014, noting that some of the areas have already consulted during CRD IV consultations. 

• Auditing and Accounting 

The PCBS report recommended that banks should prepare a separate set of accounts for regulators on the basis of specified prudent principles set by the Prudential Regulation Authority (PRA).  The PRA comment that they are currently working with “other authorities and the FPC” on this recommendation and will consider the “costs and benefits of such an initiative” as well as the impact that the new CRD IV regulatory reporting regime may have. 

The PCBS report also recommended that auditors of banks should meet regularly with the PRA and FCA – and more often than the once a year required by current Codes of Practice.  The PRA response is that “for each of the four largest UK banks, there were at least four bilaterals between the supervisors and auditors”.  They also comment that the first report on the quality of dialogue between supervisors and regulated firms’ auditors is scheduled for June 2014. 

The government has proposed a series of amendments to the Financial Services (Banking Reform Bill), for consideration in Lords Committee, to incorporate, among other things, the above and other recommendations of the Parliamentary Commission on Banking Standards.

For full details of the Bank of England and the FCA responses and next steps in implementing the recommendations please refer to the links below. 

Click for:

• FCA press release (link to FCA website)
• Full FCA response (link to FCA website)
• Bank of England press release (link to Bank of England website)
• Full Bank of England response (link to Bank of England website)   
• Banking Reform Bill proposed amendments (link to UK government website)
• Our previous story on the final report of the Parliamentary Commission on Banking Standards.