Julian Korek, CEO of Kinetic Partners

The Financial Services Banking Reform Bill will provide the most significant change to the UK banking sector in a generation. Designed to be the legislative response to the financial crisis and other banking scandals such as Libor, one of the bill’s primary objectives was to require banks to separate everyday retail banking activities from their investment banking activities by introducing a ring-fence around the deposits of individuals and small and medium-sized businesses. 

At the EU level, Michel Barnier, the EU Commissioner responsible for internal market and services, published a draft law earlier this year aiming to curb speculative trading at banks and, in certain instances, force banks to ring-fence other trading activities. That said, policymakers are seeking additional clarity on such topics as the degree to which the banks are allowed to trade with hedge funds and, in relation to market making, the thresholds that would trigger mandatory ring-fencing.   The new Capital Requirements Directive (CRD IV), which came into effect on 1 January 2014, brings into force financial buffers to ensure that banks are more able to absorb losses during a crisis. It will also enable the Prudential Regulation Authority (PRA) to hold senior bankers criminally liable for recklessly disregarding their responsibilities. There is likely to be a considerable burden of proof, but essentially, ignorance will no longer be a viable defence for senior managers.

Greater personal responsibility

One of the primary goals of the Banking Reform Bill is to increase consumer confidence by ensuring that savers’ assets are kept safe from certain risky investments. The bill will therefore place new responsibilities not only on the banks, but also on CEOs and heads of risk.

As a result, all of these individuals will be held personally responsible for examining how the firm’s funds are being used, as well as fostering an appropriate culture within their organisations. In order to achieve this goal, the bill will put senior staff under greater regulatory scrutiny, effectively making it much harder for those at the top to defer blame if their bank fails to meet its regulatory requirements.  Over the last two years the regulator has increasingly demanded attestations by senior managers, which require a firm’s leadership to sign their names to affirmations that systems and controls are in compliance with FCA rules. These written statements are meant confer a greater degree of personal liability to the signatory.

Interestingly, the findings of Kinetic’s recent Global Regulatory Outlook survey seem to show support for this stance. The survey of 300 senior executives revealed that 27% of CEOs and 40% of employees believe that making executives criminally accountable for the activities undertaken by the firm would serve the industry well, as opposed to only 33% who disagree.

As a consequence, financial services firms may find it more challenging to fill these senior roles, since fewer people may be willing to take on this risk. This sense of personal responsibility, however, is a necessary component of the bill, as it is designed to actively encourage firms to create a culture of responsibility within their organisations.

After all, unless firms are willing and able to make individuals accountable for certain aspects of the business and the functions that they oversee, decision makers will continue to pass important tasks and controls on to others the organisation, which can lead to problems falling between departments.  In order to address this issue, we have found that high-level health checks and deep-dive reviews can often provide senior personnel with a greater degree of confidence when they are asked to sign attestation letters requested by the regulator.

Re-gaining consumer trust  

Another key aim of the Banking Reform Bill is to develop greater transparency for consumers. However, there are no guarantees that this will be the case.  There is concern that the Banking Reform Bill’s restrictions on investment risk might actually limit choice for consumers, which would be counter-productive. Perhaps even more concerning, the operational changes required by the bill could potentially decrease banks’ ability to respond to certain market shocks, since they will limit the crossover between their retail and investment activities. As many have argued that many of the issues that led to the crisis were consumer-generated, for example sub-prime mortgages, one might reasonably question whether these measures realistically reduce the risk to the system.

The good news, however, is that we are already starting to see a significant cultural shift in some organisations, as the consumer protection elements of the bill are encouraging firms to adopt a new perspective on risk. As a result, banks are taking steps to secure repeat business by building greater consumer trust, and forward-looking firms are starting to see how these changes can help to support sustainable, long-term growth for the financial services industry as a whole.

Regulations like the Banking Reform Bill clearly have an admirable goal, as they aim to protect the financial system and build consumer confidence. The question however, is whether the public is truly taking any notice of these changes and whether anyone, including the government, fully understands the implications of the bill’s impact.

Kinetic Partners’ Global Regulatory Outlook survey found that 97% of financial services professionals don’t believe enough has been done to prevent a future crash and only 12% of respondents believe that regulators fully understand how the financial crisis was allowed to happen in the first place. This begs the question as to whether or not new laws and regulations could realistically have an effective impact if public confidence in the regulators is lacking. Building this confidence is imperative for success, and regulators must remain mindful of this as they continue to produce legislation.

Interestingly, Antony Jenkins, CEO of Barclays, stated earlier this year that it would take 10 years to rebuild trust in the bank’s brand. However, only time will be able to tell whether the Banking Reform Bill can help achieve this goal. In the meantime, firms must consider how these regulations can be used to support a fundamental shift in culture, so that consumer confidence can be restored and maintained across the board.