United Kingdom
Financial Sector Assessment Program-Basel Core Principles for Effective Banking Supervision-Detailed Assessment Report

This paper provides detailed assessment of observance on the Basel Core Principles for Effective Banking Supervision. The current assessment took place during a period of continuing development and transition. It is based on the assessors’ understanding of the current state of the supervisory approach, but also incorporates, where relevant, the available information about changes expected in the near future. Stress testing has become a critical supervisory tool that encourages firms and supervisors to adopt a more forward-looking view on the strength of their balance sheets and resilience to shocks. The emphasis on stress testing has encouraged firms to strengthen their internal analytical and risk-management capabilities.

Abstract

This paper provides detailed assessment of observance on the Basel Core Principles for Effective Banking Supervision. The current assessment took place during a period of continuing development and transition. It is based on the assessors’ understanding of the current state of the supervisory approach, but also incorporates, where relevant, the available information about changes expected in the near future. Stress testing has become a critical supervisory tool that encourages firms and supervisors to adopt a more forward-looking view on the strength of their balance sheets and resilience to shocks. The emphasis on stress testing has encouraged firms to strengthen their internal analytical and risk-management capabilities.

Introduction4

26. This assessment of the current state of the implementation of the BCP in the U.K. was conducted during November 3–19, 2015. It reflects the regulatory and supervisory framework in place as of the date of the completion of the assessment. It is not intended to represent an analysis of the state of the banking sector or crisis management framework, which are addressed in the broader FSAP exercise.

27. An assessment of the effectiveness of banking supervision involves a review of the legal framework as well as a detailed examination of the policies and practices of the institutions responsible for banking regulation and supervision.

A. Information and Methodology Used for the Assessment

28. The U.K. authorities agreed to be assessed according to the revised BCPs issued by the Basel Committee for Banking Supervision (BCBS) in September 2012. The assessment was thus performed using a different methodological basis as compared with the previous BCP assessment carried out in 2011. It is important to note, for completeness’ sake, that the two assessments will not be directly comparable: the revised BCPs have a heightened focus on corporate governance and risk management, their practice by supervised entities, and their assessment by the supervisory authority. The revised BCPs raise expectations in measuring the effectiveness of a supervisory framework (see box for more information on the revised BCPs).

29. The U.K. authorities chose to be assessed and rated against both the Essential Criteria (EC) and the Additional Criteria (AC) articulated in the BCP document. To assess compliance, the BCP methodology uses a set of essential and sometimes additional assessment criteria for each principle. The EC are usually the only elements on which to gauge full compliance with a Core Principle (CP). The ACs are recommended best practices against which the U.K. authorities have agreed to be assessed and rated. This option was not available to countries assessed prior to 2012 publication of the revised BCPs. The assessment of compliance with each CP is made on a qualitative basis to allow a judgment on whether the criteria are fulfilled in practice. Effective application of relevant laws and regulations is essential to provide indication that the criteria are met. A four-part grading system is used: compliant; largely compliant; materially noncompliant; and noncompliant. This grading system is explained below.

30. The assessment team reviewed the framework of laws, rules, and guidance and held extensive meetings with U.K. officials. The team conducted additional meetings with banking-sector participants and other stakeholders (auditors, associations, and other market observers). The authorities provided a comprehensive self-assessment of the BCPs, as well as detailed responses to additional questionnaires. In addition, the authorities facilitated access to a variety of supervisory documents and files, staff and systems.

31. The team appreciated the high level of cooperation, candor, and transparency that the authorities demonstrated throughout the review. The team extends its thanks to staff of the authorities, all of whom provided excellent cooperation and undertook considerable efforts to make available extensive documentation as well as access to staff with expertise on U.K. supervisory policies, procedures, and practices. Assessors appreciated, as well, the opportunity to meet with additional official staff with expertise related to the implementation of global regulatory changes under Basel III, its implementation in the EU through the Capital Requirements Directive (CRD) and Capital Requirements Regulation (CRR), and further national regulatory changes. Finally, the assessment team wishes to express its appreciation to the numerous market participants and observers who shared voluntarily their personal insight into the evolution of U.K. supervisory practices.

32. An assessment of compliance with the BCPs is not, and is not intended to be, an exact science; in addition, the BCBS considers the BCPs to be minimum rather than absolute standards. To reach its conclusions regarding the compliance of the U.K. approach to banking supervision against the BCPs, the assessment team did exercise judgment. Nevertheless, the team sought to adhere to a common, agreed methodology that is consistent with assessments done of other countries subsequent to the 2012 release of the revised BCPs. Consequently, the assessment is intended to provide U.K. authorities with an internationally consistent measure of their compliance with the BCPs.

33. To determine the observation of each principle, the assessment has made use of five categories: compliant; largely compliant, materially noncompliant, noncompliant, and nonapplicable. An assessment of “compliant” is given when all EC and ACs are met without any significant deficiencies, including instances where the principle has been achieved by other means. A “largely compliant” assessment is given when there are only minor shortcomings that do not raise serious concerns about the authority’s ability to achieve the objective of the principle; moreover, there is clear intent to achieve full compliance with the principle within a prescribed period of time (for instance, the regulatory framework is agreed but has not yet been fully implemented). A principle is considered to be “materially noncompliant” in case of severe shortcomings, despite the existence of formal rules and procedures; furthermore, evidence suggests that supervision has clearly not been effective, that the practical implementation is weak, or that the shortcomings are sufficient to raise doubts about the authority’s ability to achieve compliance. A principle is assessed “noncompliant” if it is not substantially implemented, several ECs are not complied with, or supervision is manifestly ineffective. Finally, a category of “nonapplicable” is reserved for those cases that the criteria would not relate the country’s circumstances.

The 2012 Revised Basel Core Principles

The revised BCPs reflect market and regulatory developments since the last revision, taking account of the lessons learnt from the financial crisis in 2008/2009. These have also been informed by the experiences gained from FSAP assessments as well as recommendations issued by the G-20 and Financial Stability Board (FSB) and take into account the importance now attached to the following considerations: (i) greater supervisory intensity and allocation of adequate resources to deal effectively with systemically important banks; (ii) application of a system-wide, macro perspective to the microprudential supervision of banks to assist in identifying, analyzing and taking preemptive action to address systemic risk; (iii) the increasing focus on effective crisis preparation and management, recovery and resolution measures for reducing both the probability and impact of a bank failure; and (iv) efforts to foster robust market discipline through sound supervisory practices in the areas of corporate governance, disclosure and transparency.

The revised BCPs strengthen the requirements for supervisors, the approaches to supervision and supervisors’ expectations of banks. Supervisors are now required to assess the risk profile of the banks not only in terms of the risks they run and the efficacy of their risk management, but also in terms of the risks they pose to the banking and the financial systems. In addition, supervisors are required to consider how the macroeconomic environment, business trends, and the build-up and concentration of risk inside and outside the banking sector may affect the risks to which individual banks are exposed. While the BCPs set out the powers that supervisors should have to address safety and soundness concerns, there is a heightened focus on the actual use of the powers, in a forward-looking approach through early intervention.

The number of principles has increased from 25 to 29. The number of essential criteria has expanded from 196 to 231. This includes the amalgamation of previous criteria (which remained largely the same as what was contained in the prior version of the BCPs), and the introduction of 35 new essential criteria. For countries that choose to be assessed against the “additional criteria,” 16 additional criteria articulate “best practices” to comply with selected CPs.

While raising expectations for banking supervision, the BCP were drafted with the recognition that they must be applicable to a wide range of jurisdictions. The new methodology reinforces the concept of “proportionality,” both in terms of adjusting the expectations on supervisors and in terms of adjusting the standards that supervisors impose on banks depending on the circumstances. The proportionate approach allows assessments of banking supervision that are commensurate with the risk profile and systemic importance of a wide range of banks and banking systems.

B. Institutional and Market Structure—Overview5

34. The Financial Services Act 2012 established a new framework for financial regulation in the United Kingdom. Responsibility for financial stability was given to the newly established FPC of the BoE: the BoE Act 1998, as amended by the Financial Services Act 2012, gives the FPC responsibility to identify, assess, monitor, and take action in relation to financial stability risk across the whole financial system. This includes addressing risks arising in the nonbank financial system (including institutions and markets). In support of this objective, the Act gives the FPC the power to make recommendations to Her Majesty’s Treasury (HMT) on regulated activities, as well as more general powers in respect of information gathering. Responsibility for the overall regulatory framework and the protection of the public finances rests with HMT and the Chancellor of the Exchequer.

35. Two new regulatory agencies have been established, replacing the FSA. The Financial Services Act 2012 transferred prudential regulation of deposit-takers,6 insurers and the largest investment firms to a new microprudential supervisor, the PRA, a subsidiary of the BoE. Responsibility for regulating conduct of business was given to the FCA, with the mandate and tools to protect consumers and market participants, including through the promotion of competition. The PRA and FCA started to operate in April 2013.

36. The BoE is the resolution authority responsible for preparing and responding to the failure of banks, building societies, certain investment firms and central counterparties in accordance with the U.K.’s special resolution regime. The BoE is also responsible for the regulation of systemically important firms supporting the clearing, payment and settlement infrastructure in the United Kingdom.

37. Most U.K. financial institutions are regulated in some form, although not all activities undertaken by these institutions are subject to regulation. Finance companies are subject to different regulation depending on whether they are owned by banks (PRA and FCA regulated), or nonbanks but provide residential mortgages or consumer credit (FCA regulated) or undertake business lending (for amounts exceeding GBP 25,000) or provide certain types of buy to let mortgages (unregulated). Securitization special purpose vehicles (SPVs) may be regulated depending on whether they are part of a banking group.

38. The FPC has a statutory power to make recommendations to HMT in relation to the boundaries between and within regulated and non-regulated sectors of the U.K. financial system (the ‘regulatory perimeter’). The FPC has committed to hold a discussion on the issue of the regulatory perimeter at least annually. In July 2015, the FPC considered channels through which stress in key parts of the nonbank financial system (including institutions and markets) could impact U.K. financial stability. Based on its current assessment, the FPC said that it did not see a case for recommending changes to the regulatory framework but would return to the issue on an annual basis, or sooner, if risks were identified.

39. The financial services Banking Reform Act (BRA) 2013 implemented the final ring-fencing recommendations of the independent commission on banking (ICB). The ICB recommended that retail banking should be separated from wholesale or investment banking, and that this should be achieved by ring-fencing, or separating, retail banking within a banking group in order to isolate banking activities where continuous provision of service is vital to the economy and to the customers of a bank. The BRA also implemented the recommendations made by the PCBS, appointed by parliament to consider how culture and standards in the banking sector could be improved. In particular the BRA put in place the legal framework for the “Senior Managers and Certification Regime” which strengthens the regulation of individuals who work in the U.K. banking sector. Finally, the BRA makes available to the BoE a stabilization option (the “bail-in option”) under part 1 of the BRA 2009.

40. Parliament passed a new BoE and Financial Service Act (though most of its provisions have not come into force yet). The Act sets out reforms to ensure that the BoE remains at the forefront of international best practice for transparency, accountability, and governance. The Act undertakes the following:

  • Maximize the synergies of having monetary policy, macroprudential policy and microprudential policy under the aegis of one institution by bringing the PRA within the BoE, ending its status as a subsidiary, and creating a new committee of the BoE to be known as the PRC. It will retain its independence in making rules, policies and supervisory decisions. The statutory objectives of the PRA, which underpin its forward-looking, judgment-based approach to supervision, will remain unchanged;

  • Reinforce the accountability of the PRC and the chief executive officer (CEO) for the BoE’s prudential regulation functions, and provide updated reporting requirements which will ensure supervision continues to operate with appropriate independence and resources;

  • Update resolution planning and crisis management arrangements between the Treasury and the BoE to reflect recent improvements to resolution planning for systemic financial institutions, and crisis management for institutions in distress. This includes a strengthened requirement for the BoE to provide the Treasury with information on risks to public funds, so that the system can better protect taxpayers and the wider economy from bank failures;

  • Improve the governance of the BoE by making its court of directors (‘the court’) a smaller, more focused unitary Board;

  • Place the new deputy governor for banking and markets in legislation, adding the position to the court of directors and the FPC;

  • Adjust the statutory basis of the FPC from a subcommittee of the court to a statutory committee of the BoE, in line with the MPC and the new PRC;

  • Bring the BoE within the purview of the National Audit Office (NAO), improving transparency and accountability for its use of resources;

  • Further strengthen coordination arrangements between the Treasury and the BoE in protecting taxpayers and the wider economy from bank failures; and

  • Extend the Senior Managers and Certification Regime to all financial services firms, and implement a fairer system by introducing a ‘duty of responsibility’ (superseding the previously proposed ‘reverse burden of proof’).

41. As a member of the EU, the United Kingdom adheres to the European ‘single Rulebook,’ whose backbone is represented by the 2013 CRD and Regulation (the ‘CRD IV package’). The CRD IV package was part of the response to the recent financial crisis and implements the Basel III capital and liquidity standards, as well as rules on corporate governance. The Regulation and Directive came into force from January 1, 2014, but gave member states (MS) time to transition to the final rules.

42. The CRD IV package is a ‘going concern’ framework. It aims to ensure that in normal times, banks are adequately capitalized to absorb losses, to pay their obligations in a stress and have adequate governance, systems and controls.

43. The 2014 Banking Recovery and Resolution Directive (BRRD) applies to non-viable banks. It introduced a harmonized set of resolution tools to ensure that when EU banks fail, that failure can be managed in a way which protects critical functions, limits contagion to other financial institutions and the wider economy, and avoids the need for taxpayer bail-out.

44. The 2014 Deposit Guarantee Scheme Directive (DGSD) is intended to harmonize deposit protection across the European Economic Area (EEA), and to ensure that robust, well-functioning schemes are in place. This will promote depositor confidence and support financial stability. It harmonizes deposit protection at EUR 100,000 per depositor per bank and also mandates protection for temporary high balances (e.g., during the sale or purchase of a house, or following a large insurance payment into a bank account). It requires MSs to ensure that ex ante funding equivalent to 0.8 percent of covered deposits is available. As it is intended to improve deposit protection and financial stability, and since a deposit guarantee scheme can be used in resolution, there is substantial interaction with the BRRD.

45. Total assets in the U.K. banking sector were almost 400 percent of nominal GDP in 2014, excluding derivative exposures and foreign assets and liabilities of foreign branches. There are over 900 banks, building societies and credit unions supervised by the PRA.7 Within the total of 900 there are 150 deposit-taking foreign branches and 98 deposit-taking foreign subsidiaries in the United Kingdom from 56 different countries. Foreign banks constitute around half of U.K. banking sector assets on a residency basis, with the combined assets of the largest ten foreign subsidiaries in the United Kingdom (including their non deposit-taking entities) totaling around GBP 2.75 trillion. Foreign branches account for around 30 percent of total U.K.-resident banking assets and around a third of U.K. interbank lending. Nearly a fifth of global banking activity is booked in the United Kingdom, and U.K.-resident banks’ foreign assets and liabilities account for over 350 percent of U.K. GDP.

46. Financial services is the United Kingdom’s most successful export industry, contributing a trade surplus of over GBP 59 billion in 2013 according to the Office for National Statistics (ONS). The United Kingdom is the most international banking centre in the world; foreign branches account for around 30 percent of total U.K.-resident banking assets.

47. The financial services industry employs over a million people across the length and breadth of the country. A million more are employed in complementary professional services. Two thirds of those two million jobs are outside London.

48. The U.K. financial sector has been hit, in the past years, by episodes of wrongdoing at major firms that gave rise to investigations, also under criminal laws, and that have seen several systemic banks subject to important fines.

49. Major U.K. banks have continued to improve capital and funding positions. They reported an average CET1 position above 12 percent and an aggregate leverage ratio over 4.7 percent at end–September 2015. In November 2012, the FPC recommended that the FSA “takes action to ensure that the capital of U.K. banks and building societies reflects a proper valuation of their assets, a realistic assessment of future conduct costs and prudent calculation of risk weights.” The FPC also recommended that “where such action reveals that capital buffers need to be strengthened to absorb losses and sustain credit availability in the event of stress, the FSA should ensure that firms either raise capital or take steps to restructure their business and balance sheets in ways that do not hinder lending to the real economy.” In March 2013, the FPC judged that the immediate objective should be to achieve a CET1 ratio, based on Basel III definitions and after the required adjustments, of at least 7 percent of risk-weighted assets (RWA) by end 2013. The improved capital position of banks also reflects, in part, the actions taken in response to the 2014 stress test of the major U.K. banks that captured some of the main risks judged by the FPC to be facing the system.

50. Stress tests are used primarily to assess the amount of capital that a bank might require in the event of an adverse shock. A critical precondition to make that assessment is that banks’ reported capital positions are stated accurately. AQRs help ensure this, both in terms of capital resources and capital requirements.

51. As a result of the interventions during the 2008–9 financial crisis, the government also has holdings in the Royal Bank of Scotland (RBS) and the Lloyds Banking Group. Disposals have begun, and at the end of August 2015 government holdings stood at just under 13 percent ownership in Lloyds, and 73 percent in RBS.

C. Preconditions for Effective Banking Supervision

Macroeconomic policies

52. The Government’s economic policy objective is to achieve strong, sustainable and balanced growth that is more evenly shared across the country and between industries. This objective recognizes that over a number of years preceding the financial crisis, economic growth in the U.K. was driven by unsustainable levels of private sector debt and rising public sector debt. This pattern of unbalanced growth and excessive debt helped to create exceptional economic challenges in the United Kingdom.

53. The BoE’s monetary policy objective is to deliver price stability—low inflation—and, subject to that, to support the government’s economic objectives including those for growth and employment. The BoE’s operations in the sterling money markets have two objectives, stemming from its monetary policy and financial stability responsibilities: to implement the MPC’s decisions in order to meet the inflation target (set by the government at 2 percent); and to reduce the cost of disruption to the liquidity and payment services supplied by banks to the U.K. economy.

The Government’s economic strategy consists of four key pillars:

  • a) monetary activism and credit easing, stimulating demand, maintaining price stability and supporting the flow of credit in the economy;

  • b) deficit reduction, returning the public finances to a sustainable position and ensuring that sound public finances and fiscal credibility underpin low long-term interest rates;

  • c) completing the reform of the financial system and improving the regulatory framework to reduce risks to the taxpayer and build the resilience of the system; and

  • d) a comprehensive package of structural reforms, rebalancing and strengthening the economy for the future, including a package of measures to support businesses to invest and export.

54. The Government’s comprehensive economic strategy is designed to protect the economy, to maintain market confidence in the United Kingdom and to lay the foundations for a stronger, more balanced economy in the future. Continuing to strengthen the financial system, so that it can support the wider economy, is a key element of this strategy.

Financial stability and macroprudential surveillance

55. The FPC was officially established on April 1, 2013.8 The committee is charged with a primary objective of identifying, monitoring and taking action to remove or reduce systemic risks with a view to protecting and enhancing the resilience of the U.K. financial system. The FPC has a secondary objective to support the economic policy of the government. The committee publishes a record of its formal policy meetings, and is responsible for the BoE’s bi-annual Financial Stability Report (FSR).

56. The FPC is a statutory subcommittee of the BoE’s Court. Its members are the governor; three of the deputy governors who are responsible for financial stability, prudential regulation, and monetary policy, respectively; the chief executive of the FCA; the BoE’s executive director for Financial Stability Strategy and Risk (FSSR); four external members appointed by the Chancellor; and a nonvoting member from HMT.

57. The FPC has responsibility for setting the countercyclical capital buffer (CCB) and powers of direction over sectoral capital requirements (SCRs), loan-to-value and debt-to-income limits in respect of owner-occupied lending, and in relation to leverage ratio tools. There is a statutory requirement for the FPC to prepare and maintain a general statement of policy for the powers of Direction it is given under legislation. These describe the tools, the likely impact of using them on financial stability and growth, and the circumstances in which the FPC might expect to use each tool. They also describe the core indicators the FPC will routinely review to help inform its judgments.

Public infrastructure

58. The United Kingdom has reputation for a robust and stable legal system, skilled workforce and fairly well-developed public infrastructure. It ranks high in the World Bank ‘Ease of Doing Business’ classification (6th at international level both in 2015 and 2016), with medium-high score for the strength of its insolvency framework, maximum score for depth of credit information and very high ranking (4th) for the protection of minority investors. Its payment, clearing and settlement systems are well regulated. Basic economic, financial and social statistics are publicly available.

Financial safety nets and crisis management

59. The Financial Services Compensation Scheme (FSCS) is the U.K.’s compensation fund of last resort for customers of authorized financial services firms. It covers business conducted by firms authorized by the PRA and FCA. European firms (authorized by their home state regulator) that operate in the United Kingdom may also be covered. It protects:

  • Deposits;

  • Insurance policies;

  • Insurance broking (for business on or after January 14, 2005), including connected travel insurance where the policy is sold alongside a holiday or other related travel (e.g., by travel firms and holiday providers) (for business on or after January 1, 2009);

  • Investment business; and

  • Home finance (for business on or after October 31, 2004).

60. The FSCS is independent of the government and the financial industry, and was set up under the Financial Services and Markets Act (FSMA) 2000, becoming operational on December 1, 2001 (although it still covers claims from before this date). It may pay compensation if a firm is unable, or likely to be unable, to pay claims against it. This is usually because it has stopped trading or has been declared in default. The FSCS does not charge individual consumers for using the service.

61. The key principle of financial crisis management is to make clear who is in charge of what, and when. The BoE and HMT have clear and separate responsibilities. The BoE has primary operational responsibility for financial crisis management. The Chancellor and HMT have sole responsibility for any decision involving public funds. When the BoE has formally notified the Treasury of a material risk to public funds, and either there is a serious threat to financial stability, or public funds are already committed by the Treasury to resolve or reduce such a serious threat and it would be in the public interest to do so, the Chancellor may use powers to direct the BoE.

62. The Financial Crisis Management Memorandum of Understanding (MoU) sets out who is in charge of what and when between HMT and the BoE (including the PRA) in a financial crisis. It has a particular focus on monitoring and managing potential risks to public funds.

63. A core aspect of the PRA’s approach is that it aims at ensuring preparedness for recovery or resolution of a failing firm. The PRA has the authority to set rules and supervisory requirements for financial holding companies (FHCs), mixed financial holding companies (MFHCs), mixed activity FHCs, banks, building societies, and PRA-designated investment firms.

The PRA’s rules require supervised entities to undertake the following:

  • To be better prepared for future financial stress through credible and robust recovery planning (identification of options to recover financial strength in stress situations);

  • To provide information (‘resolution packs’) to help the BoE in its role as the resolution authority; and

  • To ensure the feasibility of bailing-in creditors, in the case of cross-border firms, by adopting contractual recognition of bail-in.

Market discipline

64. In terms of market discipline, an extensive set of institutional investors are active in the United Kingdom, as are major rating agencies and analysts. Well-developed mechanisms support market discipline, including a system of regular disclosure by public companies. Required disclosures for banks have been materially enhanced through the additional annual disclosures based on Pillar 3 of the Basel III global regulatory framework.

65. Some banks make quarterly financial disclosures and some half-yearly. Regular financial statement disclosures related to market risk, liquidity risk and credit concentrations. The FPC of the BoE prepares and publishes a FSR twice per calendar year. The FSR sets out the FPC’s view of the outlook for U.K. financial stability, including its assessment of the resilience of the U.K. financial system and the current main risks to financial stability, and the action it is taking to remove or reduce those risks.

66. Since the financial crisis the United Kingdom has fundamentally reformed its financial sector and has pushed for international reforms to help end too-big-to fail and ensure effective market discipline. As outlined below, the United Kingdom has well established and mature markets which have effective mechanisms for ensuring market discipline.

67. The FRC sets governance guidelines for listed companies with premium listing through the U.K. Corporate Governance Code. High quality corporate governance helps to underpin long-term company performance. The U.K. Corporate Governance Code has been instrumental in spreading best Boardroom practice throughout the listed sector since it was first issued in 1992. It operates on the principle of ‘comply or explain.’ It sets out good practice covering issues such as Board composition and effectiveness, the role of Board committees, risk management, remuneration and relations with shareholders.9

68. In November 2012, the government published its response to the 17 specific recommendations of an independent review of U.K. equity markets.10 In particular, the report reviewed the mechanisms of control and accountability provided by the markets and the behavior of the agents in that process that affect the performance of U.K. businesses. It aimed to ensure that U.K. equity markets continue to benefit both companies and investors.

69. The Panel on Takeovers and Mergers (the “Panel”) is an independent body, established in 1968, whose main functions are to issue and administer the City Code on Takeovers and Mergers (the “Code”) and to supervise and regulate takeovers and other matters to which the Code applies in accordance with the rules set out in the Code. It has been designated as the supervisory authority to carry out certain regulatory functions in relation to takeovers pursuant to the Directive on Takeover Bids (2004/25/EC) (the “Directive”). Its statutory functions are set out in and under Chapter 1 of Part 28 of the Companies Act 2006. The Panel regulates takeover bids and other merger transactions (however effected) for companies which have their registered offices in the United Kingdom, the Channel Islands or the Isle of Man if any of their securities are admitted to trading on a regulated market or multilateral trading facility in the United Kingdom or on any stock exchange in the Channel Islands or the Isle of Man. Its remit also extends to other public companies and certain private companies which are resident in the United Kingdom, the Channel Islands or the Isle of Man. In certain circumstances the panel also shares responsibility for the regulation of an offer with the takeover regulator in another MS of the an EEA (a “MS”) (for example, where the offered company is registered in the United Kingdom and has its securities admitted to trading on a regulated market in another MS but not on a regulated market in the United Kingdom).

70. The Code is designed to ensure that shareholders are treated fairly and are not denied an opportunity to decide on the merits of a takeover and that shareholders of the same class are afforded equivalent treatment by an offeror. The Code also provides an orderly framework within which takeovers are conducted. In addition, it is designed to promote, in conjunction with other regulatory regimes, the integrity of the financial markets. The Code is not concerned with the financial or commercial advantages or disadvantages of a takeover. These are matters for the company and its shareholders.

71. The U.K. Financial Investments (UKFI) was created in November 2008 as part of the U.K.’s response to the financial crisis. It is a Companies Act Company, with HMT as its sole shareholder, and operates at arm’s-length from government. UKFI is responsible for managing the Government’s shareholdings in the RBS Group plc and the Lloyds Banking Group plc.

72. UKFI’s overarching objective is to manage these shareholdings commercially to create and protect value for the taxpayer as shareholder. Its aim is also to devise and execute a strategy for realizing value for the government’s investments in an orderly and active way over time within the context of protecting and creating value for the taxpayer as shareholder, paying due regard to the maintenance of financial stability and acting in a way that promotes competition. UKFI is also responsible for managing the Government’s 100 percent shareholding and loans in U.K. Asset Resolution Limited (“UKAR”) and its subsidiaries.

73. UKAR was formed during 2010 to integrate the activities of Northern Rock (asset management) plc and Bradford & Bingley Plc. UKFI managed the government’s 100 percent shareholding in Northern Rock plc from Northern Rock plc’s formation on January 1, 2010 up to its sale to Virgin Money on January 1, 2012.

Consumer protection

74. One of the FCA’s central responsibilities is to protect consumers from the firms and individuals in the financial industry that may cause them harm. The FCA expects firms to provide customers with appropriate products and services. To ensure consumers are protected and treated fairly, the FCA evaluates firms’ abilities to meet relevant supervisory requirements before they are authorized. The FCA then supervises their activities and prevents those that are not meeting standards from carrying out regulated activities. Where the FCA finds that firms are not following relevant rules, or where it finds that unauthorized firms are doing business in the United Kingdom, it intervenes where appropriate. This can take many forms, such as stepping in to impose penalties, stopping firms from carrying out certain types of business, requiring improvements in controls or management, or securing redress.

75. With respect to retail deposits, the relevant U.K. legislation and FCA rules sets down a conduct regime for banks and other account providers in relation to:

  • The provision of appropriate information, such as on terms and conditions, before an account is opened;

  • The ongoing provision or availability of information to customers about the activity on the account, such as through regular statements, as well as changes to terms and conditions such as notifications when the rate of interest applied to the balance on the account changes;

  • The making and receipt of payments on the account, and the related protections against issues such as unauthorized transactions;

  • Deposit protection; and

  • The provision of overdrafts.

76. In 2013, the government launched the ‘Current Account Switch Service.’ It lets consumers safely and reliably switches their accounts between banks in seven days, with a guarantee that they will be fully protected against any financial loss during the transfer.

Detailed Assessment

77. Compliance of each principle will be made based on the following four-grade scale: compliant, largely compliant, materially noncompliant, and noncompliant. A “not applicable” grading can be used under certain circumstances.

  • Compliant: a country will be considered compliant with a Principle when all essential criteria applicable for this country are met without any significant deficiencies.11 There may be instances, of course, where a country can demonstrate that the Principle has been achieved by other means. Conversely, due to the specific conditions in individual countries, the essential criteria may not always be sufficient to achieve the objective of the Principle, and therefore other measures may also be needed in order for the aspect of banking supervision addressed by the Principle to be considered effective.

  • Largely compliant: A country will be considered largely compliant with a Principle whenever only minor shortcomings are observed that do not raise any concerns about the authority’s ability and clear intent to achieve full compliance with the Principle within a prescribed period of time. The assessment “largely compliant” can be used when the system does not meet all essential criteria, but the overall effectiveness is sufficiently good, and no material risks are left unaddressed.

  • Materially noncompliant: A country will be considered materially non-compliant with a Principle whenever there are severe shortcomings, despite the existence of formal rules, regulations, and procedures, and there is evidence that supervision has clearly not been effective, that practical implementation is weak, or that the shortcomings are sufficient to raise doubts about the authority’s ability to achieve compliance. It is acknowledged that the “gap” between “largely compliant” and “materially non-compliant” is wide, and that the choice may be difficult. On the other hand, the intention has been to force the assessors to make a clear statement.

  • Noncompliant: A country will be considered non-compliant with a Principle whenever there has been no substantive implementation of the Principle, several essential criteria are not complied with, or supervision is manifestly ineffective.

A. Supervisory Powers, Responsibilities, and Functions

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