Overhaul of UK banking rules could expose sector to more risk

 

The UK government has unveiled plans to reform and ‘turbo-grow’ the country’s banking sector through a series of significant changes to existing regulations.

Treasury Secretary Jeremy Hunt announced the Edinburgh Financial Services Reform. Here are his 30+ regulatory reforms aimed at “replacing and replacing hundreds of pages of cumbersome EU law”.

Big Questions: The main changes to UK financial services are:

Rethink the ring fence. In the wake of the global financial crisis, regulations were introduced to force lenders to separate their retail and investment banking divisions. This is intended to protect customers and prevent future government bailouts.

Congress will consider this next year. Implementing the changes could take years, but smaller banks like Virgin Money and Santander could be exempt from compliance. It can also give big banks like NatWest and Lloyds the freedom to raise business capital so they can sell more complex products to their customers.

Addressing managerial accountability. Other regulations to consider include the senior management system, which covers how senior management is hired, monitored, and sanctioned. Under the current regime, introduced since 2008, officers must be held personally responsible for rule violations unless they have taken “reasonable steps” to prevent violations. Penalties can be imposed for bad behavior, decision-making or work culture and include fines and bans.

Investments by insurance companies. To encourage investment, the government wants to give insurance companies more freedom to invest in long-term assets such as homes and wind farms. The government has already announced plans to remove the cap on bankers’ bonuses.

ESG is in the spotlight. The Treasury Department said it will launch an updated green finance strategy in early 2023 and hold consultations to include environmental, social and governance (ESG) rating providers in its regulations.

Considered cryptocurrency. The aforementioned Edinburgh reforms ensure that the government has the power to conduct various crypto “activities” under UK regulation. The government also noted its plans to join the Central Bank of England (CBDC) digital currency discussions with the Bank of England in the coming weeks.

Why it works: The government is pushing reforms to give banks more freedom and end overly strict EU rules that could boost the growth of the industry.

The lifting of ring fencing rules could make UK banks more competitive by reducing costs and would be a boon for lenders like Goldman Sachs’ Marcus.

In addition, deregulation of operators and insurers would reduce fear of fines and increase freedom to take risks. Edinburgh’s reforms also signal the government’s ambition to turn the UK into a global leader in sustainable finance and a global cryptocurrency hub through favorable regulation, but so far there has been little clear change.

A word of warning: The main criticism of regulatory restructuring is that it encourages banks to take more risk. Many of the regulations were put in place to protect the sector from crises and the need for government bank bailouts. It gives financial institutions more freedom, but also less protection.

Reducing management accountability can lead to more risk-taking.

Originally published at https://businessdor.com on January 27, 2023.