The FCA (Financial Conduct Authority) and the PRA (Prudential Regulatory Authority) continue their investigation into Barclays’ statement characterising Staley’s relationship with Epstein.

The statement said it should be noted that the investigation makes no findings that Staley (pictured) saw, or was aware of, any of Epstein’s alleged crimes, which was the central question underpinning Barclays’ support for Staley following the arrest of Epstein in the summer of 2019.

The Board stated its disappointment, adding that Staley has run the bank successfully since December 2015, clarified the group strategy, transformed its operations and materially improved its results.

Barclays said: “The regulatory process still has to run its full course and it is not appropriate for Barclays to comment further on the preliminary conclusions.”

New CEO

With effect from 1 November 2021, C.S. Venkatakrishnan (known as Venkat) will take over as group chief executive, subject to regulatory approval, and as a director of Barclays.

Prior to his appointment as group chief executive, Venkat served as head of global markets and co-president of Barclays from October 2020 and group chief risk officer from 2016 to 2020.

Before joining Barclays in 2016, he worked at JP Morgan Chase from 1994, holding senior roles in asset management including chief investment officer in global fixed income. He also held senior roles in investment banking, and in risk.

Venkat will receive fixed pay of £2.7m, delivered 50 per cent in cash paid monthly and 50 per cent delivered in Barclays shares as part of his remuneration package.

Staley is entitled to 12 months’ notice from Barclays so continues to receive his current fixed pay of £2.4m per annum delivered in cash and Barclays shares, a pension allowance of £120,000 per annum and other benefits until 31 October 2022 alongside eligibility to repatriation costs to the US.

Susannah Streeter, senior investment and markets analyst, Hargreaves Lansdown said: “The repercussions from the Jeffrey Epstein scandal stretch far and wide, and now Barclays finds itself at the centre of the storm. For the chief executive, Jes Staley, to step down following an investigation by city regulators into his dealings with Epstein, it’s clear the conclusions of the probe are critical. While the probe did not centre on Mr Staley’s role at Barclays but what he disclosed about his previous position at JP Morgan, what was under question was how he characterised his former relationship with the disgraced financier.

“Although detail is limited, it appears regulators believe there was a distinct lack of transparency over this relationship. It’s understood Staley will contest the conclusions, and clearly the board want to distance Barclays from what could be a long drawn out process.”

Barclays shares fell three per cent in early trading.

Whistleblowing failings

In May 2018, the FCA and PRA hit Staley with a £642,430 fine – or a tenth of his salary – for failings relating to a whistleblower at the bank.

Staley tried to uncover the identity of a whistleblower at the bank following an anonymous letter to Barclays in 2016 from someone who claimed to be a shareholder.

The letter contained various allegations, some of which concerned Staley. The regulators said that given his conflict Staley should have maintained distance and consulted with teams within Barclays with responsibility for whistleblowing, but he failed to do this.

The FCA and PRA added that he had not acted with due skill, care and diligence in his response.

The lender, which received its banking licence in November last year, is currently not authorised to take deposits but by meeting capital requirements it can apply for approval to launch savings products for personal and business customers.

According to Recognise Bank, it plans to offer savings accounts to personal customers in the coming weeks, then business customers later this year and personal savers in the next five years.

The capital raise includes an additional £10m investment by existing shareholder Ruth Parasol, who is real estate investor and entrepreneur Ruth Parasol.

She said: “Recognise is the right bank, with the right team, to change SME business banking in the UK. Recognise combines personal service with the cutting-edge digital banking technology to increase speed and service to its customers. As a fully authorised bank, Recognise will be able to offer a much wider range of services to business and personal customers.”

Jason Oakley (pictured), chief executive officer of Recognise Bank, said: “This is a major milestone in our journey to create Recognise Bank and change the complexion of SME banking in the UK.

“We set out on a mission to help the UK’s growing small and medium sized businesses, who need expert support more now than ever before. This successful capital raise is proof that we are on the right trajectory.”

The bank currently offers commercial mortgages, bridging loans, working capital loans and professional practice loans for architects and solicitors, as well as the medical and healthcare sectors. It plans to launch buy to let loans in the near future.

Since it opened its doors last year, it has received £750m in lending enquiries and is targeting £1.3bn in lending to more than 5,000 SME borrowers over the next five years.

Effective 23 August, the bank made reductions to other mortgages including reductions of up to 0.05 per cent on selected five-year fixed house purchase at 75-85 per cent LTV rates and five-year fixed remortgages at 60-80 per cent LTV. 

It also made reductions of up to 0.25 per cent on rates on selected buy-to-let fixed and tracker remortgages of up to 75 per cent LTV. 

Nick Smith, TSB’s head of mortgages, said: “We’ve made a number of changes to our mortgage range with the sole purpose of helping more people borrow well, our changes are aimed at helping landlords as well as homeowners with both small and large deposits.” 

Recovering margins 

Since the beginning of this year, Moneyfacts analysis has shown that the strongest rate competition appeared to take place at the maximum 95 per cent LTV market. As a result, the two-year average fixed rate at this tier was driven down from 3.46 per cent on 1 January to 3.24 per cent by 16 May, where it has remained relatively unchanged since. 

Darren Cook, financial expert at Moneyfacts, said: “I can confirm that there has been little activity at high LTVs. 

“What may be happening in this instance is that competition at high LTVs was strong, lenders were clearly cutting risk margins to compete, the PRA showed some concern in May, now lenders may be looking at recovering these risk margins that they previously sacrificed.”

In May, the PRA said it had a “a very sceptical eye” on mortgage lenders and their strategies for managing lending risk exposure. The price wars in the market had resulted in lenders “risking up”, evident in the increase in higher loan-to-value and loan-to-income lending.

Sam Woods, Bank of England deputy governor for prudential regulation and chief executive of the PRA, said at the time that although the shifts may be “well within firms’ management capabilities”, the regulatory body would be watching the sector “like a hawk”.

The review, conducted by Mark Zelmer, warned that although improvements had been made there was still further work to do and made a series of recommendations for regulators to improve their oversight.

Zelmer added that the Bank of England (BoE) and Prudential Regulation Authority (PRA) should not let their regulatory focus slip in any prolonged periods of financial calm.

He also noted that there was a risk that Open Banking could lead to more runs on banks and building societies, particularly smaller institutions.

Missed chances to intervene

Zelmer’s review examined how regulators oversaw the Co-op Bank between 2008 and 2013, during which it neared collapse.

Regarding the Co-op Bank case, Zelmer found the FSA missed several chances to examine the bank in greater detail, particularly around its purchase of the beleaguered Britannia Building Society.

However, he also noted that the FSA acted reasonably in not intervening to halt the bid and acknowledged the unprecedented situation at that time in the UK financial system, and that it would be unreasonable to have begun stress tests sooner.

Key findings of the report included:

• FSA’s stress tests were appropriate and conducted early enough;
• FSA did not interrogate Co-op Bank’s due diligence of the merger with Britannia Building Society in enough detail;
• FSA should have reviewed performance of Co-op Bank’s loan book sooner;
• FSA did not pay enough attention to the refinancing risk of Co-op Bank’s loan book;
• FSA approved the merger despite balance sheet issues;
• FSA supervisors did not check the impact of Co-op Bank’s substantial IT expenditure;
• FSA acted reasonably in not intervening to halt the bid.

Regulation reform recommendations

Zelmer also assessed how the regulatory environment has changed since then and if it was well prepared for further shocks.

As a result eight recommendations were made on how the regulatory environment needed to be amended.

Zelmer signed off the report by highlighting the risk of letting prudential supervision slip away if there was a period of longer-term financial stability.

“I conclude by noting that if the UK experiences a protracted benign economic environment in the future, there is a risk that prudential oversight could fade into the background at the BoE and receive commensurately less executive attention and resources in an institution where the culture is heavily skewed in favour of macroeconomics,” he said.

“The PRA and the BoE may wish to consider how they can best guard against this risk in the future.”

The eight recommendations are:

• The PRA and the BoE should continue to evolve their stress test exercises so that they encompass a broad range of risks to which banks are exposed, and consider how best to incorporate the inherent uncertainty that would prevail as a stress scenario unfolds in real life.

• The PRA and BoE should continue to study how best to use the new resolution tools in systemic situations.

• The PRA should consider how best to balance its objective of promoting the safety and soundness of PRA-authorised firms, with its particular focus on the harm that firms can cause to financial stability, against the interests of individual classes of depositors or creditors that may end up being adversely affected or exposed to more risk in response to the actions of the authorities.

• The PRA and BoE are encouraged to take advantage of the new information on asset encumbrances and consider whether there should be some formal or informal constraints on the extent to which banks and other deposit-taking institutions can encumber their assets in normal circumstances and how best to factor encumbrances into the recovery and resolution plans for these institutions.

• PRA supervisors would benefit from more detailed internal guidance on how to assess the risks to which regulated financial institutions are exposed and the associated mitigants, as well as on how to assess significant transactions of those institutions.

• The Prudential Regulation Committee and the executive management of the PRA should continue to play a leading role in ensuring that supervisory strategies for individual firms proactively take account of emerging regulatory developments.

• The PRA should continue to pay close attention to any attempts by banks to circumvent regulatory and supervisory requirements and focus on the economic substance of transactions, not their accounting treatment or how they are funded.

• The PRA should consider introducing more formal third-party reviews of key prudential information supplied by banking groups through their regulatory data returns.

‘Challenging environment’

The Bank of England and PRA published a joint response to the report, which included substantial replies to all eight recommendations.

FCA chairman Charles Randell said: “The PRA and the bank welcome the report, which acknowledges the significant changes to prudential regulation that have taken place since the financial crisis, and notes the very challenging environment in which the FSA operated during this time,” they said.

“The PRA has started working on the recommendations, and will provide published updates.”

The bank’s Prudential Regulation Authority (PRA) said it was generally standing by new requirements first laid out in July for equity release providers to change how they assess liabilities related to house price growth.

However, the regulator has softened its stance over some of the capital requirements for insurers.

It means some lenders will not be required to hold as much capital as initially feared.

Just Group said the “regime envisaged is considerably less onerous” than first set out, but added the requirements are still “very prudent”.

The rules are set to take effect in December 2019, also giving insurers more time to prepare than initially proposed.

Core proposals unchanged

Equity release mortgage redemption payments are ultimately funded by the sale of property, and firms therefore remain exposed to the risk that house price growth above the risk-free rate does not materialise, David Rule the PRA’s executive director, insurance supervision warned in a letter to a letter to chief executives.

He said: “While we have made some changes based on consultation responses, the core of our proposals is unchanged.

“We will use our Effective Value Test [EVT] as a diagnostic tool to ensure compliance with Solvency II requirements relating to the calculation of the matching adjustment benefit where liabilities are matched by restructured equity release mortgages, recognising in particular the risks arising from the no negative equity guarantee feature.”

In response, Rodney Cook, group chief executive of Just Group, said: “We welcome the greater clarity provided by the policy statement, and the PRA’s recognition of the important role played by equity release mortgages for our customers as they plan their retirement finances.

“The regime envisaged is considerably less onerous for Just than set out in the consultation, particularly in respect of pre-Solvency II business, and the outcome is well within the range of what we have been planning for.

“However, even at the 13%/1% parameters confirmed today, we view the EVT as very prudent, as for JRL2 it is equivalent to holding capital and technical provisions sufficient for the price of every house in the portfolio to fall immediately by over 35% and then remain there indefinitely.”

David Burrowes, chairman of the Equity Release Council, added: “Equity release is a prudent and highly regulated area of financial services to ensure market stability and good customer outcomes.

“Having fed into the PRA’s consultation process, we welcome the revisions included in today’s policy statement in addition to the extra time provided to implement its proposals.

“We will seek to work closely with the regulator ahead of 31 December 2019 to ensure that implementation supports this socially important product.”

Its consultation, which was published in early July, closed on 30 September and set out further detail on the expectations for firms investing in equity release mortgage portfolios.

The PRA initially proposed implementing the new rules at the end of this year.

However, in response to the consultation feedback it has pushed this back to 31 December 2019.

In a statement, the PRA said: “The proposed implementation date for the proposals in the CP was Monday 31 December 2018. Based on feedback to the consultation, the PRA has decided that the implementation date will not be before 31 December 2019.

“The PRA is making this announcement now in order to clarify the position for insurers planning their year-end 2018 processes.

“The PRA is currently giving careful consideration to the consultation responses and the impact, if any, of the updated implementation date to the proposed phase-in period. The PRA will publish final policy and supervisory statements in due course,” it added.

The new requirements will change how equity release providers assess their liabilities which could require lenders to hold more capital to cover their lending.

Some lenders had warned that the changes could affect their profit levels and so the year delay is likely to be welcomed by the industry.

The watchdog also wants to make sure the market for ‘green finance’ is competitive and able to grow, as the transition to a low carbon economy and financial products on offer could change.

A discussion paper with four areas, including the two outlined above, has been issued by the FCA.

The FCA also looks at how investments in pensions will be need to take account of climate change risk and how to make sure investors are given information about the impacts of change.

At the same time, the Prudential Regulation Authority’s (PRA) has published a consultation on enhancing banks’ and insurers’ approaches to managing the financial risks from climate change.

The two bodies are also setting up a Climate Financial Risk Forum, with membership finalised by the end of November and the first meeting to take place in early 2019.

Andrew Bailey, chief executive at the FCA said: “Climate change presents a disruptive and potentially irreversible threat to the planet.

“The impact of climate change on financial markets is uncertain but legal frameworks – at a global, European and UK level – have already begun to adapt to reflect a move to a low carbon economy.

“The FCA can play a key role in providing more structure and protection to consumers for green finance products and ensuring that the market develops in an orderly and fair way which meets users’ needs.”

It warned that the Prudential Regulation Authority (PRA) may have ignored concerns about the viability of NNEGs promised by lenders.

The report claims that the under-valuation of these guarantees in equity release mortgages is a ticking time bomb and that the PRA made only half-hearted attempts to address this.

However, in July the PRA proposed new requirements for equity release providers to change how they assess their liabilities which could require lenders to hold more capital to cover their lending.

This follows on from a series of speeches and policy tightening around equity release since 2015.

Overexposed loans

The free market think tank commissioned the research in association with the BBC.

Its analysis argued that lenders could find themselves overexposed due to the potential of people living longer and house prices declining or not rising fast enough to keep up with the loan value.

The authors conducted six stress tests to see how poorly an equity release loan would perform under severe economic conditions.

The two tests involving house price risk were conducted using a 30% and 40% crash in property prices, while in another test borrower longevity was increased by an average of two years.

In the 2008 house market crash, prices fell by around 16% before recovering to slight gains in 2009.

Report author Kevin Dowd, professor of finance and economics at Durham University, said the situation had echoes of that of Equitable Life which under-valued its long-term guarantees.

“Now the equity release sector is in deep trouble for the same reason,” he said.

“In both cases, the firms involved got into difficulties because they were using voodoo valuation methods that had no scientific validation. Same causes, same results.”

Prudent approach

The equity release industry rejected the assertions made in the report noting that it would continue to engage with the regulator’s consultations, while the PRA said it was not commenting on the issue.

An Equity Release Council spokesperson said: “This is a prudent and highly regulated area of financial services to ensure market stability and good customer outcomes.

“While the detail of pricing decisions are commercially sensitive, common factors in offering an NNEG include three fundamental lines of security: a prudent view of house price trends with allowances for future uncertainty; stress tests for very adverse scenarios; and significant extra risk capital to ensure that, in an extreme adverse event in the residential property market, providers remain able to meet future obligations to policyholders.

“We understand the general approach to NNEG pricing reflects current accepted rules and will continue to consult on this matter with the PRA as indicated.”

A spokesperson from Legal & General Home Finance noted that it was committed to growing the market in a safe and sustainable manner.

“We welcome the PRA’s consultation into the lifetime mortgage market,” he said.

“We believe in taking a prudent approach to all assumptions and calculations, including those relating to the NNEG, and as both the UK’s largest institutional investor and the leading provider of lifetime mortgages, the financial security of our customers is central to everything we do.”

A combined discussion paper from the Bank of England, Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA) sets out an approach to improve the operational resilience of firms and financial market infrastructures (FMIs).

It noted that “boards and senior management can achieve better standards of operational resilience through increased focus on setting, monitoring and testing specific impact tolerances for key business services, which define the amount of disruption that could be tolerated”.

The regulators have made a point in especially calling for responses from those who have suffered harm from bank and financial institution disruption.

Disruption to mortgage processing

The authorities envisage that firms may need to establish time-based impact tolerances for services such as transferring funds between accounts, processing mortgages, and performing collateral management.

They were keen to understand what types of metrics firms used regarding tolerance for outages and said the “translation of impact tolerances into actual investment decisions and contingency planning is of particular interest”.

Whether there is clear governance and accountability, and how the impact tolerances are tested, was also raised by the watchdogs.

And they added that they would consider how effective the board was “in providing governance and leadership to their organisation’s resilience work, and in developing the necessary capabilities”.

Recent events

Although not mentioned by name, the report highlighted “recent disruptive events” which have harmed customers and raised the risk of seriously affecting the economy as a whole.

Most recently TSB encountered an IT meltdown which lasted almost a month with more than 1,300 customers suffering from fraud during the outage.

They highlighted that the need for better communication with those most affected by the disruptions, particularly customers, should be at the forefront of every firm’s response.

Overall, the regulators raised three key points which need to be considered by boards:

• focus on the continuity of the most important business services as an essential component of managing operational resilience;
• setting board-approved impact tolerances which quantify the level of disruption that could be tolerated;
• and planning on the assumption that disruption will occur as well as seeking to prevent it.

Wider economic harm

The watchdogs also warned that an operational disruption such as one caused by a cyberattack, failed outsourcing or technological change could impact UK financial stability.

This could, they said, pose a risk to the supply of vital services on which the real economy depends, threaten the viability of individual firms and financial market infrastructures, and cause harm to consumers and other market participants in the financial system.

Mark Zelmer was appointed in March to conduct the independent review which will examine regulatory supervision of the Co-operative Bank during the significant five-year period of 2008 to 2013.

A protocol for the investigation has also been published and Zelmer has appointed Grant Thornton to support his work.

As part of the protocol, the Prudential Regulation Authority (PRA) has promised that any documents which it holds requested by Zelmer will not be withheld, however it noted that agreement to any meetings by current or former staff would be voluntary.

The review terms also require that any individuals, groups of people or organisations to be criticised in the final report must be given a reasonable opportunity to respond before the final report.

£1,500 per day

In an update letter sent to the economic secretary to the treasury, PRA senior responsible officer Norval Bryson explained how the regulator would co-operate with the review.

“The PRA will ensure that Mr Zelmer has access to any additional external support and the resources that he requires in order to conduct the independent review,” he said.

“Mr Zelmer is being paid at a rate of £1,500 per day spent on the review, plus expenses.

“We have now agreed a protocol for the conduct of the inquiry with Mr Zelmer, the FCA (Financial Conduct Authority) and HMT (HM Treasury) and I am grateful for the input of your officials to its preparation,” he added.