“the Question Is Whether the Bank of England’s Capital Relaxation Signifies a General Positive Shift in Mood Towards the Bank Sector, and a Softening of Other Restrictions…”

By Chris Burke, CEO of Brickendon

Chris Burke

UK-based banks are being hit from all sides at the moment, with Britain’s decision to leave the EU placing a heavy burden of uncertainty on a sector already struggling to compete globally thanks to the raft of stringent regulations placed upon them. The Bank of England’s decision to relax the capital requirements, releasing £150billion, is a step in the right direction, but does it go far enough?[1]

The issue is whether this decision means the Bank of England will now start relaxing other regulations too. Since 2010 it has been harder to run a bank in the UK than in other parts of the world, which has put the sector at a disadvantage.[2]

Compliance and regulatory costs have increased dramatically since the financial crisis with a raft of safeguarding legislation such as the banking levy, increased capital requirements and the issue of globally systemically important banks weighing heavily on financial institutions. The introduction of new regulations such as the Fundamental Review of the Trading Book (FRTB) and the Senior Managers Certification Regime (SM&CR) means costs are expected to increase even higher, with some industry insiders estimating that FRTB alone could push up a bank’s operating costs by as much as 400 per cent[3].

UK banks are already being impacted substantially by a number of things. The decision to leave the EU will add to the pressure and put yet more strain on the financial services sector, making it harder to remain competitive and increasing the risk that the UK loses its hub for banking services.

In order to tackle some of these issues banks themselves need to ensure their business is operating as efficiently as possible and continuing to maximise revenue growth, whilst remaining regulatory compliant. However, organisations should not become too diverted by financial compliance issues as this can distract from developing the business and lead to a significant loss of competitiveness. Annual profits at the UK’s five largest banks last year were 63 per cent lower than in 2007, whereas US competitors reached pre-crisis profit levels as early as 2010.[4]

One of the keys is to replace inefficient business and IT architecture with systems better-designed to handle the constantly evolving regulatory landscape which will in turn reduce operating costs and enable the reattribution of resources to developing long-term growth strategies.

On top of the heavy regulatory burden banks are already facing, Britain’s decision to leave the EU has created an atmosphere of uncertainty, which has left many financial institutions considering their future in the UK. Questions over passporting and the freedom of movement of individuals, finances and data make it difficult to see a definite future in the UK for some financial institutions, and many have already voiced their concerns and are considering relocating.

This raises the question about what can be done to prevent the UK losing its place as the European hub for banking services. Is it time for Britain to start relaxing some of its other regulations? While it could be easier for a bank to do business in somewhere like Frankfurt, it is also clear that they would struggle to attract the same talent pool as is readily available in London. Twelve times as many people work in the banking sector in the UK as they do in Frankfurt, making it difficult to make such a transition smoothly and effectively.[5] Moving further afield also poses problems, such as language, location of customer base and difficulty of staff recruitment and retention.

So what can the UK government do to help financial institutions and encourage them to stay, and is the relaxing of capital requirements enough?

The question is whether this relaxation signifies a general softening of other restrictions. Will the UK government further reduce the corporate tax rate, relax some of the ring-fencing rules and reduce or abolish the banking levy? If they do, there could be a significant business case for banks to not only remain but to expand here.

It remains to be seen whether UK banks can become a Global force again, but in the meantime, the key is to ensure you know your business well and ensure you are in a position to adapt to any changes as required.