The Financial Services Banking Reform Bill will deliver the most significant reform of the UK banking sector in a generation. Designed to be the legislative answer to the financial crisis and other banking scandals such as Libor, one of the bill’s primary intentions was to require banks to segregate everyday retail banking activities from their investment banking activities by introducing a ring-fence around the deposits of individuals and small and medium-sized businesses.
At an EU level, Michel Barnier, the EU Commissioner responsible for internal market and services, published a draft law last week to curb speculative trading at banks and in certain instances force banks to ring-fence other trading activities. That said additional clarity is being sought in areas such as how much the banks can trade with hedge funds and, in relation to market making, what thresholds would trigger mandatory ring-fencing. The new Capital Requirements Directive (CRD IV), which came into effect on 1st January 2014, brings into force financial buffers to ensure that banks are better able to absorb losses during a crisis. It will also enable the Prudential Regulation Authority to hold senior bankers criminally responsible for recklessly disregarding, in effect turning a blind eye to, their responsibilities. There is likely to be a considerable burden of proof, but in essence, ignorance will no longer be a viable defence for senior managers.
Greater personal responsibility
One of the main objectives of the Banking Reform Bill is to build consumer confidence by ensuring that savers’ assets are kept safe from any risky investments. The bill will therefore place new burdens not only on the banks, but also on CEOs and heads of risk.
As a result, all of these individuals will consequently be held personally responsible for monitoring what the firm’s funds are being used for as well as creating an appropriate culture within their organisations. In order to achieve this goal, the bill will put senior staff under greater regulatory scrutiny, effectively making it much more difficult for those at the top to shift the blame if their bank fails to meet its regulatory obligations.
Interestingly, the findings of our recent Global Regulatory Outlook report seem to show support for this stance. The report, which surveyed 300 senior executives, found that 27% of CEOs and 40% of employees believe that making executives criminally accountable for the activities undertaken by the firm would serve the industry well, as opposed to only 33% who disagree.
As a result, financial services firms may find it more difficult to fill these senior roles, since fewer people may be willing to take on this risk. This sense of personal liability, however, is an essential component of the bill, as it is designed to actively encourage firms to create a culture of responsibility within their organisations.
After all, unless firms are willing and able to make individuals responsible for certain aspects of the business and the functions that they oversee, decision makers will continue to defer important tasks and controls elsewhere in the organisation, which can lead to issues falling between departments. In order to address this issue, we have found that high-level health checks and deep-dive reviews can often give senior personnel a greater degree of confidence when they are asked to sign the attestation letters requested by the regulator.
Re-building consumer trust
Another key aim of the Banking Reform Bill is to provide greater transparency for consumers. However, there are no guarantees that this will be the case. One possible consequence of the Banking Reform Bill could be that the restrictions on investment risk might actually limit choice for consumers, which would obviously be counterproductive. Even more worryingly, there is also a possibility that the operational changes required by the bill may actually reduce the banks’ ability to respond to certain market shocks, since they will limit the crossover between their retail and investment activities. As many of the issues that led to crisis were arguably consumer-generated, for example sub-prime mortgages, one might reasonably wonder whether these measures realistically reduce the risk to the system.
The good news, however, is that we are already starting to see a significant cultural shift in some organisations, as the consumer protection elements of the bill are encouraging firms to adopt a new perspective on risk. As a result, banks are taking steps to secure repeat business by building greater consumer trust, and forward-looking managers are starting to see how these changes can help to support sustainable, long-term growth for the financial services industry as a whole.
Regulations like the Banking Reform Bill clearly have an admirable goal, as they aim to protect the financial system and build consumer confidence. The question however, is whether the public is truly taking any notice of these changes and whether anyone, including the government, fully understands the implications of the bill’s impact.
Interestingly, Antony Jenkins, CEO of Barclays, recently stated that it would take 10 years to rebuild trust in the bank’s brand. However, only time will tell whether the Banking Reform Bill will help to achieve this goal. In the meantime, firms need to consider how these regulations can be used to support a fundamental shift in culture, so that consumer confidence can be restored and maintained across the board.
