Regulation  

Time to ring changes

This year will not be that fallow a period. Instead, firms will again be set the challenge of both implementing further changes to how they operate as well as looking at the development of new initiatives which will come into force in the coming years.

The current Banking Reform Bill is perhaps illustrative of the multitude of initiatives currently under development. What started as a bill to implement the key proposals of the Independent Commission on Banking has developed into a hybrid, multi-faceted piece of legislation covering subjects as diverse as the ring-fencing proposals for retail and investment banks, the creation of a new payment systems regulator, the FCA duty to impose interest rate caps on certain types of consumer credit lending and the introduction of criminal sanctions for senior managers of banks who act in a reckless manner causing an institution to fail.

Agenda

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These initiatives do have a common theme indicating an increasingly political financial services agenda with government taking a central role in setting the agenda for change.

Many of the changes which will come into play during 2014 still have their genesis in the financial crisis of 2007/08. When the Banking Reform Bill passes into law, the statutory framework for the split of retail and investment banking activities will be in place and next year will see an increased focus on the detail of the split contained in the secondary legislation and PRA rules. With the proposed introduction of the senior management regime for banks, there will be a focus on governance.

Ensuring the continued solvency of financial institutions will also be an important theme during 2014. The implementation of Basel III and the high level of scrutiny of banks’ balance sheets both at a global level and through national supervisors will mean that for banks capital remains high on the agenda. Insurance companies will also be concerned with the implementation of Solvency II and will need to be taking steps to prepare for the implementation date in 2016.

The scope of financial regulation will continue to be under review. Some ‘shadow banking’ activities will be brought within the regulatory framework while others will be preparing for regulation and involved in lobbying or developing legislative initiatives – again on global, EU and national levels. This year will see measures which will regulate shadow banking, including the proposed EU regulation on money market funds. This is intended both to secure the financing role of money market funds and also to address the fact that, although such funds are of importance, they are not sufficiently regulated to date.

In the UK, there will be a continued focus on consumer protection. April will be a busy month for those involved in consumer finance with the FCA taking over regulation of consumer credit on 1 April and the implementation of the Mortgage Market Review changes on 26 April. Those in the retail sector will also be focusing on the development and completion of key EU directives in this area including the Mortgage Credit Directive, Payment Services Directive 2 and the Payment Accounts Directive. One consumer protection measure which affects alternative funds is the FCA’s guidelines which will ban the promotion of unregulated collective investment schemes and close substitutes to the vast majority of ordinary retail investors (with the exception of certified and self-certified sophisticated and high net-worth investors). These rules came into effect on 1 January this year.