Reforms since the Financial Crisis
The banking industry has undergone a number of major reforms since the financial crisis. Over 80 pieces of
legislation have been passed to make the financial system more stable and secure. Banks have substantially
increased the amount of capital they hold to ensure that the taxpayer never again has to bail out a bank. In
addition, changes to remuneration mean that risk is much more closely aligned with reward. These reforms,
alongside a new regulatory regime both in the UK and Europe, are key steps in restoring public trust and
confidence in the banking sector.
A much safer financial system
Banks hold more capital – Banks have rebuilt their balance sheets in the wake of the global financial crisis and
are now much safer. UK banks have increased the amount of the highest quality capital they hold by five times
compared to the beginning of the financial crisis. They are also holding significantly more high quality liquid
assets which would enable them to survive a liquidity induced stress, as happened in 2007. By 2019, when
Basel III is fully implemented, they will be even more robust. The UK’s implementation is significantly ahead of
schedule, and accordingly the UK and its banks are among the best placed in the world.
Ring-fencing – The UK’s largest banks have their investment arms separated from their retail arms. This
improves the resilience and resolvability of banks by protecting retail banking services from risks elsewhere in
the financial system.
Bail-in – The UK is one of the first regimes to adopt a statutory bail-in power which enables the Bank of
England to expose certain creditors of a failed bank to loss by writing down or converting their interests into
new capital. This type of orderly resolution ensures that the critical functions a bank provides to the economy
can be continued in the event of its failure. This is a key tool to end the problem that banks are considered too
big to fail.
Less exposure – The banks have restructured their balance sheets to reduce exposures to riskier trading
assets.
Stress tests – The UK’s largest banks take part in both the Bank of England’s and European Central Bank’s
stress tests. These confirm that that the UK’s banking industry is in a much stronger position and that the recent
reforms are working.
Huge changes to remuneration
Bonuses deferred – Senior and highly paid bank
employees in the UK, or those who can take material
risks on behalf of their banks, are subject to the
Remuneration Code, which has been strengthened
in recent years. The Code requires that at least 40%
of any bonuses paid must be deferred over at least
three years, and can be reduced or cancelled if poor
performance or conduct issues subsequently come to
light. The PRA is currently consulting on extending the
period of deferral to between five and seven years.
Aligning risk and reward – There has been a
significant shift away from cash bonuses to rewarding
staff with shares – under the FCA’s Remuneration
Code bankers classed as “Code Staff ” have to have
at least half of their bonuses paid in shares. This
means that bankers are not rewarded for failure but
are incentivised to make decisions that benefit their
businesses, shareholders and the broader economy.
Clawback – From the start of 2015 the PRA is
requiring that all variable pay – both deferred and
undeferred – for senior bankers who are material risk
takers can be clawed back for seven years following
award by employers where there is evidence of
employee misbehaviour or a material failure of risk
management. This removes the asymmetry that
existed previously where bankers were rewarded for
their successes but not penalised for their failures. The
PRA is currently consulting on clawing back bonuses
already paid for up to ten years from the date of the
award.
Bonus pool has halved since 2009 – The bonus pool
for bankers in the UK and the wider Europe, Middle
East and Africa (EMEA) region has fallen by 50% since
2009. The average bonus received by individual staff
members in EMEA has reduced by 35%. [McLagan
Review of the Reward Environment in the Banking
Industry, January 2015].
Total bank pay is falling 9% a year – The total
amount (salary plus bonuses) that banks have paid
their EMEA staff has fallen by 32% since 2009 – or 9%
per year. Bank staff pay has fallen from 41% of firms’
net revenue to 25%. [McLagan, January 2015].
Executive pay is increasing in other industries –
Since 2007 bonuses in the rest of the economy have
increased by 11%. Bank CEOs are paid 6-32% less
than their peers at other FTSE 100 companies. [ONS
Labour Market Statistics, McLagan January 2015].
Setting and enforcing standards for
individual conduct
Strengthening personal accountability – From March
2016 the new Senior Manager and Certification
Regime will:
• clarify the lines of responsibility at the top of banks;
• enhance the regulators’ ability to hold senior individuals in banks to account;
• require banks to annually certify their material risk takers for fitness and propriety; and
• put in place new criminal sanctions for actions
taken which lead to the failure of a bank.
Improving standards – The Banking Standards Board
(BSB) is an independent body charged with promoting
high standards across banks and building societies
in the UK. Chaired by Dame Colette Bowe, the BSB
was set up with the support of the UK’s largest banks
and building society and will be responsible for setting
standards for culture, competence and customer
outcomes. The Board will publish an annual report
showing the progress banks have made and where
they are falling down.
Increasing competition
Greater choice for businesses – The Small Business,
Enterprise and Employment Act contains provisions
for banks to refer on SMEs they turn down for
finance, and share SMEs’ credit data with peer-topeer lenders, crowdfunders and other alternative
finance providers so that they can gain access to firms
seeking finance.
Increased switching – The Current Account Switch
Service (CASS) has enabled customers to change
their current account provider with greater speed
and ease, with the assurance that their new bank is
responsible for transferring over all direct debits and
standing orders. It has also resulted in smaller banks
enticing customers from some of the larger lenders
with attractive offers. In the first twelve months since
the launch of CASS in September 2013 there were
1,203,334 switches. This represents a 22% increase
on the number of switches during the same time
period the year before when there were 985,600
switches. In April 2015 CASS extended its application
to 99% of SMEs and the redirection of payments to 36
months.
Payments regulation – The Payment Systems
Regulator became fully operational in April 2015. Its
objective is to “ensure payment systems and the
regulatory framework operate in the best interests of
service-users and the wider UK economy − promoting
rather than constraining innovation and competition.”
The PSR is currently undertaking work on indirect
access to payment systems, including increasing
transparency and formulating a code of conduct.
Raising standards; helping customers
Banking for all – In December 2014 the BBA,
working closely with the nine largest personal current
account providers in the UK, developed a new
industry standard for basic bank accounts in the UK.
The participating banks have agreed to provide the
account free of all charges to ensure that customers
who inadvertently slip into the red do not pay for their
mistakes. The account has a full range of payments
and information features, including a debit card and
access online, in branches and via the Post Office.
Customers’ money protected – Under the Financial
Services Compensation Scheme up to £85,000 of
each customer’s deposits are now 100% protected –
up from £2,000 in 2007. This scheme, which is funded
by the banks, covers 98% of customers.
Better advice for customers – Financial advisors
are now banned from receiving commission for the
products and services they recommend to customers.
This means that advisors will recommend what is best
for their customers rather than the product that gives
them the most commission. They also have to attain
new minimum professional standards of qualification.
Responsible lending – Under the Mortgage Market
Review, lenders are fully responsible for assessing
whether the customer can afford the loan, and they
will have to verify the customer’s income. Lenders
will still be allowed to grant interest-only loans, but
only where there is credible strategy for repaying
the capital. These reforms aim to ensure that the
mortgage market is sustainable and works better for
customers.
Stronger banking supervision
The UK now has a more intensive supervisory regime.
The Financial Services Authority has been split and its
responsibilities divided between new authorities:
The Prudential Regulation Authority supervises the
largest banks and the Bank of England’s Financial
Policy Committee monitors risk to the entire financial
system. This means macro-economic supervision is
better aligned, increasing the stability of the financial
system.
The Financial Conduct Authority has responsibility
for regulating the conduct of banks and bankers.
The FCA requires firms to put the well-being of their
customers at the heart of how they run their business,
promotes effective competition and ensures that
markets operate with integrity.
ESAs – New European supervisory authorities (ESAs),
including the European Banking Authority (EBA), and
the European Securities and Markets Authority (ESMA)
enhance the supervision of banks operating in Europe.
Wide reaching regulatory reforms
Since 2007, the banking sector has experienced one
of the most intensive periods of regulatory change in
modern history, with more than 80 substantial rules
and pieces of legislation passed so far. These reforms
include:
• Banking: Conduct of Business Sourcebook
(BCOBS) – insists that banks are fair, clear and not
misleading in their communication with customers;
the FSA can fine banks or even strike them off if
they infringe these rules.
• Extension of the FSA’s Approved Person
Regime – extends a regime ensuring bankers
are “fit and proper” – competency, honesty
and integrity are all taken into account in their
assessment.
• FSA Remuneration Code – makes pay more
transparent, discourages short term risk taking,
and allows for claw back of bonuses.
• Banking Act 2009 – allows the Bank of England
to wind down a bank before it is balance sheet
insolvent in order to keep the financial system
stable.
• EMIR – introduces new requirements to improve
transparency and reduce the risks associated with
the derivatives market.
• CRD II & CRD III – makes the banks safer by
making them hold more capital and improved their
management of liquidity risk.
• CRD IV – implements internationally-agreed
standards on “more capital, more liquidity” across
the EU, makes it easier for banks to facilitate
international trade, provides additional forbearance
for customers in mortgage arrears and introduces
a cap on remuneration.
• Banking Reform Act – implements a framework
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for ring-fencing the largest banks to better
protect consumers’ deposits; legislates for bail-in
measures to ensure that taxpayers’ money will not
be used to save failed banks; introduces a senior
persons regime to hold key decision-makers to
account; and makes severe misconduct a criminal
act.
Bank Recovery and Resolution Directive –
requires banks to prepare recovery plans and
authorities to be ready to resolve failed banks
without recourse to the taxpayer whilst requiring
creditors to be ‘bailed-in’.
Single Resolution Mechanism – complements
the Single Supervisory Mechanism (SSM) and
provides a structure within which to coordinate the
resolution of a failed bank, including the possibility
of creating a Single Resolution Fund.
Deposit Guarantee Schemes Directive –
enhances protection for bank account holders by
increasing the coverage and transparency of their
deposit guarantee.
MAR/CSMAD – these two pieces of legislation
together extend the scope of the current market
abuse regime to cover financial instruments traded
on new categories of platform and OTC; more
closely align the way in which market abuse rules
apply to commodity derivative and underlying
spot markets; include improper activities relating
to benchmarks within the scope of market
manipulation; introduce offences of attempted
insider dealing and market manipulation; ensure
national competent authorities have a minimum set
of investigative and enforcement powers; establish
a harmonised regime of minimum criminal and
administrative sanctions across the EU Members
States.
MiFID II/MiFIR – improves investor protection,
increases transparency, and continues the
harmonisation of regulation across the EU.
EC Bank Accounts Legislative Package –
increases access to basic banks accounts,
improves transparency, and legislates to make
account switching easier.
Packaged Retail Investment Products (PRIPS)
– increases the consistency and transparency of
complex investment products for retail consumers.
Central Securities Depositories Regulation –
harmonises securities settlement in the EU.
Multilateral Interchange Fees Regulation –
reinforces the Single Market by promoting more
secure, innovative, efficient and competitive card
payments.
• Fair and Effective Markets Review – raises
standards, professionalism and accountability of
individuals and strengthens regulation of Fixed
Income, Currency and Commodities markets.
Upcoming regulatory reforms
In the pipeline, there are a number of pieces of
legislation and rules, both UK and European, which
will have a direct impact on banks operating in the UK.
These include:
• Money Market Funds Directive – seeks to ensure
the stability of the short-term fixed income markets
in Europe.
• Benchmarks Regulation – aims at improving the
functioning and governance of benchmarks and at
ensuring that benchmarks produced and used in
the EU are not subject to manipulation.
• Bank Structural Reform – the European
Commission aims at reducing too big to fail
systematic risks by banning proprietary trading
and by giving national supervisors powers to
separate trade activities from deposit taking
activities for banks whose trading activities pose a
threat to financial stability.
• Securities Financing Transactions Regulation
– seeks to increase the transparency of certain
transactions in shadow banking.
• Revision of Payment Services Directive – aims at
laying the ground for an EU-wide Single Market for
payments.
• General Data Protection Regulation – aims
at strengthening individuals’ rights while also
removing red tape to ensure the free flow of data
within the EU’s Single Market.
For a more in-depth list please click here.
For more information please
contact: Rebecca Park on
[email protected]