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Another regulatory challenge: banking reform!


Published: 18 March 2014 | Author: Bernard Clarke

UK lenders face a series of major challenges over the next five years, and beyond, as they move to implement both national and European reforms seeking to strengthen financial institutions and to protect the banking system by making it more resilient against potential future disruption.

While the various proposed structural reforms at both a UK and European level should still allow the flexibility to provide retail mortgages through different types of lending institutions, the industry will face significant costs as part of this re-structuring. When the impact of the additional burden of reinforced capital standards and the leverage ratio are added in to the regulatory mix, lenders are facing significant costs in implementing reforms to the financial system in the coming years.

Current developments in the UK stem from the Vickers Report on banking. We took part in a number of consultations on this on behalf of members, and submitted a response to the Treasury's white paper on banking reform. Proposals were enacted at the end of last year in the Financial Services (Banking Reform) Act. 

Operating in tandem in Europe, meanwhile, the Liikenen Committee undertook a review of the financial system across the continent. And, earlier this year, the European Commission published its proposals to make financial firms more resilient.

Legislation in the UK focused on separating retail financial services from wholesale and investment banking activities by introducing a form of ring-fencing. In doing so, regulators are trying to protect activities like retail deposit-taking and lending to small businesses from riskier operations like proprietary trading. For lenders, it was important to maintain the freedom for firms, whether operating inside or outside the ring fence, to offer retail mortgages – and this has been achieved.

For UK firms and consumers, it is important that the flexibility permitted under domestic rules is not lost as a result of implementation of pan-European legislation. The European Commission’s recent proposals have retained this flexibility, but also outlined a range of models that regulators can employ. This is important for UK lenders, who want alignment between national and EU regulation.

European proposals for structural banking reform are now expected to proceed through the legislative process in the coming years. The current timetable is for some elements of this regulation to be in place by 2017, with the remainder in force by July 2018. This compares with a deadline of 2019 in the UK for the completion of ring-fencing operations.

We will continue to lobby on behalf of UK lenders for alignment in UK and European regulatory requirements, which would deliver the best outcome for firms and consumers.