This is a solution for a specific British issue, however, it is possible that some of the learning points of this could be adopted more internationally in due course.
The Parliamentary Committee on Banking Standards (PCBS) has produced its final report. The PCBS was set up by the Chancellor of the Exchequer as a cross-party and cross-chamber parliamentary committee to make recommendations on how the culture and standards of behaviour in banking could be improved.
The 600 page report is wide-ranging, expressing views on the role of management, shareholders, boards, regulators, rating agencies and auditors. The matrix below (click to enlarge) (PDF 71.8 KB) details the key implications for these stakeholders.
Bill Michael, Head of Financial Services for KPMG’s Europe, Middle East and Africa region, commented: “The Commission wants executives to be accountable for ‘reckless’ behaviour. This report goes a long way to encourage and enforce a more responsible and sustainable form of banking. By backing up their recommendations with the possibility of criminalisation, these are proposals with serious teeth. If implemented as recommended, this would put banks in the UK under one of the toughest regulatory and conduct regimes in the world.”
- Replace the current Approved Persons Regime with a tougher Senior Persons Regime that allocates personal responsibility and accountability, backed up by new rules on standards; tougher enforcement; and possible criminal sanctions.
- A self-regulated Licensing Regime for a broad range of bank staff.
- An industry-led professional standards body.
- Stronger corporate governance, including responsibility for directors of bank safety and soundness.
- A new Remuneration Code and tougher policies for variable remuneration.
- Giving the Financial Policy Committee responsibility to set the minimum leverage ratio, at a higher level than the 3 percent minimum set by the Basel 3 international standards.
- The competition authorities, the regulators and the banking industry itself to do more on basic bank accounts; the portability of current accounts; and competition and business model diversity within the retail banking sector.
- The Government to take a bolder approach to the legacy of RBS, including consideration of splitting RBS into a “good bank” and a “bad bank”.
Implications for banks
The main implications for banks is the challenges (cultural and cost) in meeting the adopted recommendations; uncertainty over which recommendations will be adopted – and in what form; and the cumulative impact of all this with all the regulatory reform initiatives already introduced, under way, or under discussion... Unclear on exact scope of who would be caught, intention is for all banks with operations in the UK, but how this would be achieved in practice is uncertain.
- Operational challenges – The proposed Senior Persons Regime and Licensing Regime and the proposed further changes to corporate governance and remuneration policy will pose significant operational challenges for banks, not least in implementing revised roles and responsibilities on top of all the changes already under way – including new EU legislative provisions on corporate governance and remuneration. Producing a separate set of regulatory accounts could also prove challenging.
- Identifying Senior Persons – This will be a challenge, requiring significant time, input from control functions and testing with peers – the criteria are different to the current definition of “Code Staff”.
- A higher minimum leverage ratio will impose further costs on banks – adding to the cost of all the other regulatory reform initiatives on capital, liquidity and risk weighted assets.
- Continued uncertainty – Banks will face a prolonged period of uncertainty while measures to improve the reach of basic bank accounts; the portability and ease of switching of current accounts; and competition and diversity within the retail banking sector are further investigated, discussed and then implemented in some form.
- Opportunities? There are some small potential upsides for banks, in the form of some regulators’ warning shots across the bows in terms of the amount of data they collect; the direct costs of the regulators; and the need for the FCA to strike an appropriate balance when exercising its powers to ban products – but these are likely to have only a minor impact.
- More regulation...Disappointingly, there is no indication that if banks rise successfully to the challenge of introducing higher standards of culture and behaviour then there might be scope to reduce some elements of regulation.
To discuss the implications further please contact:
EMA Head of Financial Services and Special Advisor to the Parliamentary Commission on Banking Standards
Partner, Financial Services Regulatory Centre of Excellence, EMA region
Seconded to the Parliamentary Commission on Banking Standards