Rt Hon Andrew Tyrie MP Treasury Committee House of Commons 14 Tothill Street SWlH 9NB. 19 January 2017 SA161124A. Our Ref:

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1 Rt Hon Andrew Tyrie MP Treasury Committee House of Commons 14 Tothill Street SWlH 9NB Financial Conduct Authority 25 The North Colonnade Canary Wharf London E14 5HS Tel : +44 (0) Fax:+44 (0) Our Ref: 19 January 2017 SA161124A Thank you for your letter of 24 November 2016 in which you have asked me to come back to the Committee on a number of points following the FCA's evidence hearing on 8 November I set these out in turn below: RBS GRG - FCA leak inquiry We have performed a thorough leak inquiry to identify whether staff that had specific knowledge of the information on RBS/GRG redress scheme prior to release may have provided any information to external parties. I can confirm that I am satisfied the leak did not originate from the FCA or any of our staff. The scope of the inquiry included: Performing an attestation exercise to ascertain that information was only shared internally with those that were on the 'Highly Sensitive Information' (HSI) list, meetings with ExCo and the Board only contained staff on the HSI list, and no discussions took place with wider colleagues not on the HSI list about the announcement. Searching mailboxes relevant to the project to ensure no suspicious activity could be found. Reviewing traffic to key media addresses to ensure there was no suspicious activity of incoming or outgoing s during the relevant period. Reviewing internal file systems to ensure there was no suspicious activity relating to documents or folders that contain information relating to the RBS/GRG announcement. On the basis of the review carried out we have found no evidence to suggest that the information allegedly shared with a number of journalists came from a member of staff at the FCA. As I informed you during the hearing, we have asked RBS to conduct a similar leak inquiry and report back to us on their progress. Once they have done so, I am happy to share the findings with you. Registered as a l1m1ted Company 1n England and Wales No Registered office as above

2 Regulatory Decision Committee (RDC) At the time of the hearing, the Chairman confirmed that we are in agreement with the Committee on addressing the perception of independence of the RDC from the FCA. We are in the process of completing this piece of work, which will require consultation with both HM Treasury and the PRA, given the PRA's recent consultation on setting up its own enforcement decision making committee. I will update the Committee once both ExCo and the Board have had the opportunity to review and discuss the proposals put forward. However, it is not a matter for the FCA to put forward proposals to give the RDC statutory autonomy - that is a matter for Parliament and Government. FCA budgeting and reporting You asked me to follow up with some further information on our 2017/18 budget and reporting of new responsibilities acquired by the FCA since its formation, and existing responsibilities inherited from the FSA. With regard to our 2017/18 budget, we are continuing with our business planning process as described in my previous letter to you on 7 November In terms of reporting, as outlined in our previous letters, increases in our costs are due to a range of factors, including our increasing and evolving remit. Our current approach to budgeting and reporting, as reflected in our approach to Consumer Credit, is to embed new responsibilities into our business as usual activity as quickly as possible in order to be more operationally efficient. As committed to you in my previous letter, we will ensure that in our 2017/18 budget, and going forward, we will track and separate out any new responsibilities, and publish this in our annual accounts. We will also undertake a piece of work which will seek to provide the best possible split of the budget between pre-and post-2013 activities. Senior Managers and Certification Regime (SM&CR) The Certification Regime takes full effect from 7 March 2017, when all in scope firms must have certified all members of staff who perform a significant harm function as fit and proper to do so. In the lead-up to this date, we will be surveying a representative sample of firms on their readiness for the Certification Regime. This will include questions on identification of staff, assessment of fitness and propriety, ongoing processes and governance. We will be in a position to compare firms' readiness, based on this information, in February. We can provide further information at this point. FCA assurance that Tesco bank successfully identified all of their customers' accounts that were affected by the cyber-attack Over the weekend of 5 November and after, the Authorities' Response Framework (ARF) was invoked to respond to the cyber-attack on Tesco Bank. We worked closely with Tesco Bank and agencies and authorities including the National Crime Agency, National Cyber Security Centre, the Treasury, and the Prudential Regulation Authority and Bank of England. During this period Tesco Bank gave us assurance that they were able to successfully identify all of their customers' accounts affected. In general the FCA requires banks to have systems and controls to counter the risk that they are misused for the purposes of financial crime risk of all types including fraud, money laundering and data security breaches. A bank is required to refund all unauthorised transactions within 24 hours, providing that the transaction was not compromised by a customer or made over 13 months ago.

3 CMA retail banking review remedies Along with future developments in the market, the CMA's package of remedies has the potential to transform aspects of how both individuals and SMEs interact with their bank. In particular, by improving technology and the information available to customers, the types of products-will become easier to access and compare. The remedies also complement other regulatory changes that are already underway. It is important to note that the remedies are designed to work together as a package, so it is therefore difficult to assess the impact they will have individually at this stage. We do, however, envisage seeing some changes as a result, such as: Improving a customer's ability to exercise choice over their banking provider through increased awareness of the options and products available to them that may better suit their needs. Encouraging firms to become more competitive on pricing, service quality and new, innovative ways to meet their customers' needs. Helping customers make decisions about their finances that are more effective for them - such as using alerts to prevent them incurring charges that may be avoidable. Encouraging third parties to develop options and products that could change the relationship between the customer and their bank. Where the CMA has made specific recommendations to the FCA our current view is that: Open banking has the potential to change the way customers manage their finances across providers. This could help them compare and contrast products, encouraging them to shop around for the best deals. By introducing specific points where customers are prompted to consider their current banking arrangements, will enable them to exercise greater choice. Publishing service quality information will encourage firms to compete not only on pricing but also on the customer experience and ways in which firms meet their customers' needs. More effective competition and improved transparency for overdraft customers will help them to make informed decisions and manage their finances more effectively. The FCA is also carrying out further work in two areas to better understand how firms' actions in one market affect another, and how conduct and competition are affected by different parts of a business model. Part of this work will look at the wider retail banking landscape, including the impact of Free-if-in-Credit (FIIC) banking more broadly than the CMA's investigation was able to, as a result of our wider objectives and powers. We will also look at the drivers behind customers holding multiple products and the impact of innovations across sectors. Our Business Plan for the year ahead will set out how we intend to undertake this work. On 29 November we published our Call for Input, starting our review into high cost credit, including consideration of overdrafts. This work will help us ascertain whether further measures will be needed to protect consumers, particularly those that may be vulnerable. More detail on this is below.

4 High cost short term credit (HCSTC) lending figures Our data have shown a significant contraction in the HCSTC (commonly known as payday) market over the course of 2014 compared with Both the number of consumers and the number of loans fell steeply: Between January 2014 and June 2015 there were over 800,000 fewer individuals taking out at least one HCSTC loan compared with January 2012 to June Between January 2014 and June 2015 there were 8.7 million HCSTC agreements - this marks a drop of 6.76 million loans when compared to a similar period in 2012 and The biggest factor in the decreased lending volumes was a significant drop in the number of applications which suggests demand for HCSTC has substantially reduced. There are a number of possible reasons for the reduced demand, which could include the negative publicity for the sector or that consumers know that it is more difficult to obtain HCSTC. The sudden and steep decline also suggests there are supply driven factors at work, such as restricting advertising and firms buying fewer leads from other companies, such as credit brokers and lead generators. Our interventions in the credit broking sector may have also contributed to this. In addition to reduced applications, there is also a discernible decrease in acceptances where rates have dropped from 50% to 30% from the start of 2014 to mid It is worth noting that there were considerable changes to the regulation of HCSTC during 2014 which also included the limits on continuous payment authorities (CPAs), increased supervisory scrutiny and a series of high profile redress schemes. While there was no discernible drop in lending volumes immediately preceding the implementation of the price cap in January 2015, firms are likely to have been changing their approach in response to the proposed structure and level of the price cap first published in July The scale of regulatory change across 2014 suggests firms changed their appetite for lending as part of an overall strategy to prepare for the full range of new regulatory requirements, the authorisation process and increased supervisory focus on compliance, particularly in relation to creditworthiness assessments. High-cost credit review timetable When we introduced the HCSTC price cap in January 2015 we committed to undertake a review of it in the first half of As noted above, on 29 November we published a call for input which marks the start of this review. We are asking for responses from stakeholders by 15 February We have decided to expand the scope of the HCSTC price cap review to include other high-cost products that we believe could pose the highest risk to our consumer protection objective (e.g. overdrafts and rent-to-own). The call for input and wider review will explore how these markets are working for consumers and how market changes impact consumers. I wrote to Rachel Reeves in November when we published the Call for Input to set out our timetable, which you also received a copy of, which reflects what I have said in my response to you. I would like to add the same caveat that the timetable needs to remain flexible to some extent and will be dependent on the information and evidence we receive, and what conclusions these lead to. Once the call for input closes, we will carefully consider the

5 responses with the aim of publishing the results of the review in the second half of From this point the timetable of what happens next is wholly dependent on the conclusions we reach. Lloyds Bank enhanced capital notes buyback cases On the issue of Enhanced Capital Notes and the decision of Lloyds Bank to buy back the bonds at par, you will be aware that the matter was considered by the Supreme Court in June 2016, which reached a decision in favour of Lloyds Bank. As Mr Kerevan noted at our most recent appearance before the Treasury Committee, in November 2015 the Complaints Commissioner reached a decision that we should have investigated complaints regarding our decision not to intervene in the Lloyds ECNs case. However, it is important to note that the Commissioner, after investigating the matter, found that our decision not to intervene was in itself a reasonable one. We accepted the Commissioner's final decision on handling complaints relating to the ECNs matter. We are currently investigating another round of complaints on the Lloyds ECNs issue, and have taken the Commissioner's decision on investigating the complaints into account while doing so. Board minutes I understand that the Committee is concerned that the minutes of bank board meetings do not record challenge put forward by non-executives to decisions taken. As discussed during the hearing, we will work jointly with the PRA to look at what more can be done to improve transparency on how boards reach their decisions and update you accordingly. As you will have seen, the FCA and PRA jointly wrote to the Institute of Chartered Secretaries and Administrators (!CSA) to notify them of our intention to consider further whether there is scope to enhance the transparency of collective decision-making. I have written separately to Mr Kerevan regarding the HFC review; in this letter I explained that we are continuing with our work on this and remain committed to providing the Committee with an update when we are able to. You will have recently received my letter to you regarding your questions on issues related to exiting the European Union. I hope that you find this information useful. i~~~m ~'f..j Andrew Bailey /" Chief Executive