Are the UK’s Banking Regulations Helping The Industry?

UK financial regulation is currently the responsibility of the Financial Services Authority. However, from April, 2013, the Financial Services Bill will create two industry regulators: the Financial Conduct Authority (FCA) and the Provincial Regulatory Authority (PRA). The FCA will regulate market practice and consumer protection, while the PRA will regulate banks and insurance companies. While financial scandals have necessitated need for increased regulation, the proposed changes may not be effective in preventing future abuse.

UK financial regulation is currently the responsibility of the Financial Services Authority. However, from April, 2013, the Financial Services Bill will create two industry regulators: the Financial Conduct Authority (FCA) and the Provincial Regulatory Authority (PRA). The FCA will regulate market practice and consumer protection, while the PRA will regulate banks and insurance companies. While financial scandals have necessitated need for increased regulation, the proposed changes may not be effective in preventing future abuse.

European Parliament adviser on financial regulation, professor Kern Alexander says of the new regulations that although “the corporate governance of banks has been appalling and the Barclays case is an example of this, the institutional reshuffling of regulatory responsibility will not prevent abuse in the future”.

Chancellor of the Exchequer George Osborne criticises the current regulatory system as “incoherent” and “without clear lines of accountability”. In the most sweeping overhaul of the banking and financial services sector in more than a decade, the new regulations will supposedly promote effective competition and give consumers greater protection than they have now. The regulations also give the chancellor the power to act unilaterally in instances where taxpayer funds are put at risk.

[quote]Of the new regulations, the Treasury said its aim was “to ensure that parliament and the public are in no doubt that the chancellor is in charge when decisions are being made about whether and how to spend public money in a future financial crisis”.[/quote]

Financial services industry leaders are cautious about the effectiveness of the regulations and warn of the likely negative aspects on the industry such as increased prices and decreased profits. Increases in the prices of some basic transaction services, like payments processing and securities custody, will lead to some institutions quitting those businesses entirely. The additional costs of regulatory requirements will prove challenging as financial institutions, such as Clydesdale Bank, must find ways to pass the costs on to customers.

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The profitability of custodial services are also at risk under the new regulations which have been designed to prevent scandals such as the Bernie Madoff  fraud scheme. Hired as custodians of funds that sent money to Madoff, some UK banks actually delegated this responsibility back to Madoff, in what was to transpire to be a classic case of the fox guarding the hen house. When Madoff was exposed as a fraudster, fund clients sued these institutions. The regulations increase the legal onus on banks by holding them responsible for their subcontractors.

Many financial institutions are likely to have less to invest, since they must retain money to build up increased capital. Trade finance service providers will also feel the heat of the new regulations as capital requirements are increased by assigning the same risk weight to trade lending as other corporate lending. These providers argue that the higher risk weight is nonsensical, given the short-term nature of these loans and their historical low loss rates.

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The regulations are subject to an observation period of two years. This period, ending March 31, 2015, will give policymakers the opportunity to monitor the impact on the financial services industry and make adjustments accordingly. Many in the UK would argue that any new regulations are not strict enough on an industry that is massively indebted to the taxpayer yet consistently fails to meet lending targets. Are these new regulatory bodies going to help the banking industry? It remains to be seen, but the mood on the streets in the UK is firmly against anything that will line the pockets of what many cite as a morally bankrupt industry.