Memorandum of Understanding between HM Treasury, the Bank of England and the Financial Services Authority (1997)
1. This memorandum of understanding establishes a framework for co-operation between HM Treasury, the Bank of England and the Financial Services Authority in the field of financial stability. It sets out the role of each institution, and explains how they will work together towards the common objective of financial stability. The division of responsibilities is based on four guiding principles:
- clear accountability. Each institution must be accountable for its actions, so each must have un-ambiguous and well-defined responsibilities;
- transparency. Parliament, the markets and the public must know who is responsible for what;
- no duplication. Each institution must have a clearly defined role, to avoid second guessing, inefficiency and the duplication of effort. This will help ensure proper accountability;
- regular information exchange. This will help each institution to discharge its responsibilities as efficiently and effectively as possible.
The Bank's responsibilities
2. The Bank will be responsible for the overall stability of the financial system as a whole which will involve:
i. stability of the monetary system. The Bank will monitor this, as part of its monetary policy functions. It will act daily in the markets, to deal with day to day fluctuations in liquidity;
ii. financial system infrastructure, in particular payments systems at home and abroad. As the bankers' bank, the Bank will stand at the heart of the system. It will fall to the Bank to advise the Chancellor, and answer for its advice, on any major problem inherent in the payments systems. The Bank will also be closely involved in developing and improving the infrastructure, and strengthening the system to help reduce systemic risk;
iii. broad overview of the system as a whole. The Bank will be uniquely placed to do this: it will be responsible for monetary stability, and will have high level representation at the institution responsible for financial regulation (through the Deputy Governor (financial stability), who will be a member of the Financial Services Authority Board). Through its involvement in the payments systems it may be the first to spot potential problems. The Bank will be able to advise on the implications for financial stability of developments in the domestic and international markets and payments systems; and it will assess the impact on monetary conditions of events in the financial sector;
iv. being able in exceptional circumstances to undertake official financial operations, in accordance with the arrangements in paragraphs 11 to 13 of this Memorandum, in order to limit the risk of problems in or affecting particular institutions spreading to other parts of the financial system;
v. the efficiency and effectiveness of the financial sector, with particular regard to international competitiveness. The Bank will continue to play its leading role in promoting the City. Much of this work will be directed towards improving the infrastructure.
The Financial Services Authority's responsibilities
3. The Financial Services Authority's powers and responsibilities will be set out in statute. It will be responsible for:
i. the authorisation and prudential supervision of banks, building societies, investment firms, insurance companies and friendly societies;
ii. the supervision of financial markets and of clearing and settlement systems;
iii. the conduct of operations in response to problem cases affecting firms, markets and clearing and settlements systems within its responsibilities, where:
a. the nature of the operations has been agreed according to the provisions of paragraphs 11 to 13 of this Memorandum; and
b. the operations do not fall within the ambit of the Bank of England defined in paragraph 2 above. (Such operations by the Financial Services Authority may include, but would not be restricted to, the changing of capital or other regulatory requirements and the facilitation of a market solution involving, for example, an introduction of new capital into a troubled firm by one or more third parties.)
iv. regulatory policy in these areas. The Financial Services Authority will advise on the regulatory implications for firms, markets and clearing systems of developments in domestic and international markets and of initiatives, both domestic and international, such as EC directives.
The Treasury's responsibilities
4. The Treasury is responsible for the overall institutional structure of regulation, and the legislation which governs it. It has no operational responsibility for the activities of the Financial Services Authority and the Bank, and shall not be involved in them. But there are a variety of circumstances where the Financial Services Authority and the Bank will need to alert the Treasury about possible problems: for example, where a serious problem arises, which could cause wider economic disruption; where there is or could be a need for a support operation; where diplomatic or foreign relations problems might arise; where a problem might suggest the need for a change in the law; or where a case is likely to lead to questions to Ministers in Parliament. This list is not exhaustive, and there will be other relevant situations. In each case it will be for the Financial Services Authority and Bank to decide whether the Treasury needs to be alerted.
Information gathering
5. Through the exercise of its statutory responsibilities, the Financial Services Authority will gather a wide range of information and data on the firms which it authorises and supervises.
6. The Financial Services Authority and the Bank will work together to avoid separate collection of the same data, to minimise the burden on firms. Where both need access to the same information, they will reach agreement as to who should collect it, and how it should be transmitted to the other.
7. The Bank will collect the data and information which it needs to discharge its responsibilities.
Information exchange
8. This will take place on several levels. The Bank's Deputy Governor (financial stability) will be a member of the Financial Services Authority Board, and the Financial Services Authority Chairman will sit on the Court of the Bank of England. At all levels, there will be close and regular contact between the Financial Services Authority and the Bank. The Financial Services Authority and Bank will establish a programme of secondments between the two institutions, to strengthen the links and foster a culture of co-operation.
9. The Financial Services Authority and the Bank will establish information sharing arrangements, to ensure that all information which is or may be relevant to the discharge of their respective responsibilities will be shared fully and freely. Each will seek to provide the other with relevant information as requested. The institution receiving this information will ensure that it is used only for discharging its responsibilities, and that it is not transmitted to third parties except where permitted by law.
Standing Committee
10. In addition to the above arrangements, there will be a Standing Committee of representatives of the Treasury, Bank and the Financial Services Authority. This will meet on a monthly basis to discuss individual cases of significance and other developments relevant to financial stability. Meetings can be called at other times by one of the participating institutions if it considers there to be an issue which needs to be addressed urgently. Each institution will have nominated representatives who can be contacted, and meet, at short notice.
11. In exceptional circumstances there may be a need for an operation which goes beyond the Bank's routine activity in the money market to implement its interest rate objectives. Such a support operation is expected to happen very rarely and would normally only be undertaken in the case of a genuine threat to the stability of the financial system to avoid a serious disturbance in the UK economy. If the Bank or the Financial Services Authority identified a problem where such a support operation might be necessary, they would immediately inform and consult with each other.
12. Each institution (the "lead institution") would take the lead on all problems arising in its area of responsibility as defined in paragraphs 2 and 3 . The lead institution would manage the situation and co-ordinate the authorities' response (including support operations). The form of the response would depend on the nature of the event and would be determined at the time.
13. In all cases the Bank and the Financial Services Authority would need to work together very closely and they would immediately inform the Treasury, in order to give the Chancellor of the Exchequer the option of refusing support action. Thereafter they would keep it informed about the developing situation, as far as circumstances allowed.
Consultation on policy changes
14. Each institution will inform the other about any major policy changes. It will consult the other in advance on any policy changes which are likely to have a bearing on the responsibilities of the other.
Membership of committees
15. The Financial Services Authority and the Bank will cooperate fully in their relations with international regulatory groups and committees. They will both be represented on the Basle Supervisors' Committee, the EMI Banking Supervisors' Sub-Committee, and on other international committees where necessary. Where only one institution is represented, it will ensure that the other can contribute information and views in advance of any meeting; and will report fully to the other after the meeting. This will promote co-operation and minimise duplication.
16. The Financial Services Authority and the Bank will keep HM Treasury informed of developments in the international regulatory community which are relevant to its responsibilities.
17. The Financial Services Authority and the Bank have agreed the following arrangements for chairing domestic market committees:
- Sterling Joint Standing Committee: Financial Services Authority
- Foreign Exchange Joint Standing Committee: Bank of England
- Derivatives Joint Standing Committee: Financial Services Authority
- Stock Lending and Repo Committee: Bank of England
18. The Financial Services Authority and the Bank will each use best endeavours to facilitate contacts by the other with overseas central banks and/or regulators, where necessary to discharge their respective responsibilities.
Provision of services
19. In some cases it will be more efficient for a service to be provided by the Financial Services Authority to the Bank, or vice versa, rather than for both institutions to meet their own needs separately. In these cases, service agreements will be established between the two institutions setting out the nature of the service to be provided, together with agreed standards, details of timing, charges (if any), notice periods, and so on. These agreements will in the first instance cover: the provision of facilities (premises, IT etc.) during the transitional phase; the provision of analysis on domestic and overseas financial markets; the provision of research; and the processing of statistical information.
Litigation
20. The Bank will retain responsibility for any liability attributable to its acts or omissions in the discharge or purported discharge of its banking supervisory functions prior to the transfer of those functions to the Financial Services Authority and shall have the sole conduct of any proceedings relating thereto. The two institutions will co-operate fully where either faces litigation.
Records
21. The Financial Services Authority will be responsible for the custody of all supervisory records. It will ensure that, within the framework of the relevant legislation, the Bank has free and open access to these records.