Analysis: From ring fencing to MiFID II, the regulatory demands on UK banks are increasing.
In recent years banks have been hit by disruption coming from several different angles, from technology enabled fintech companies, to customer demand and regulations.
Regulations arising from the global financial crisis have sought to significantly change how UK banks operate, and in order to comply with the changing requirements they have had to restructure large sections of their business.
This takes times and money and with the threat of significant fines looming over the heads of banks that fail to change, combined with challenger banks plotting a beeline for markets that traditional banks have controlled, change can’t come quickly enough.
Although the financial crisis of 2008 is often seen as a catalyst for change, there were concerns dating back to 2001 from the Competition Commission which concluded that a number of the largest banks in the UK operated a complex monopoly in the supply of services to small and medium sized enterprises. This resulted in reduced competition which negatively impacted customers.
Previously under the control of the Financial Services Authority, regulations in the UK are now handled by the Prudential Regulation Authority and the Financial Conduct Authority, following the abolition of the FSA in 2012.
Since its change of role the FCA has become a proactive legislator, meaning that it has introduced and proposed legislations that would help to promote competition, make it easier for fintechs to break into the financial services market, and change the way banks operate.
Banks are faced with preparing for ring-fencing, which will force the largest UK banks to shift their retail operations into separate subsidiaries that operate independently from riskier activities such as investment banking.
The idea is to protect tax payers from having to bail out a bank by ensuring that vital services are separate from the higher risk activities that a bank deals with.
On a more positive front from the FCA it has introduced Project Innovate, a regulatory sandbox that aims to create a safe space in which business can test products, services, business models, and delivery mechanisms in a live environment without immediately incurring the normal regulatory consequences.
To tackle the problem of competition in the banking sector, the Competition and Markets Authority has recommended the creation of open application programming interfaces (APIs) and data sharing, in addition to creating more competition it is hoped that this will promote greater transparency for account holders.
An order has been provisionally created that will require Barclays, HSBC, Nationwide, Santander, Royal Bank of Scotland, Lloyds Banking Group, Danske, Bank of Ireland, and Allied Irish Bank, to adopt and maintain common API standards through which they will share data with other providers and third parties.
The idea is to promote competition in Personal Current Accounts and retail banking services for small and medium-sized enterprises, something that could significantly help fintechs ability to eat away at the market share of the traditional banks.
While these changing regulatory requirements may already paint a pretty demanding turn around for banks, they are far from the only rules coming in.
The Markets in Financial Instruments Directive II (MiFID II) is another major piece of legislation that banks have to look at after the European Securities and Markets Authority (ESMA) published final drafts in 2015.