It seems that regulatory changes are hitting banks from every direction at the moment, and there is no sign of any let-up. In this article, Rosali Pretorius and Emma Radmore highlight imminent, and less imminent but major, changes that banks should be preparing for.
Basel 3 – Capital Requirements Directives
What? The package of capital and liquidity changes, including:
- changes to the quality and quantity of capital;
- capital buffers;
- risk coverage;
- leverage ratio;
- supervisory guidance; and
- supervisory disclosures,
will be implemented gradually, by means of various Capital Requirements Directives and FSA Rules. The UK Government firmly believes in super-equivalence (setting higher standards than a Directive requires) if appropriate and is lobbying for the right for individual countries to set higher standards if they consider them merited.
When? Changes are scheduled to take effect gradually from the beginning of 2013 up to the beginning of 2019. Several significant changes should be in place early in the timetable, including requirements on trading books, and for securitisations and re-securitisations, and gradual changes to capital.
Recovery and Resolution Plans (Living Wills) and more
What? FSA's current contribution to the debate on the best way to resolve failing significant financial institutions is its consultation paper on Recovery and Resolution Plans (RRPs or Living Wills). The RRP requirements will apply to all FSA-authorised banks and building societies regardless of size, including UK-incorporated subsidiaries of overseas banks, and to significant investment firms, in particular full scope BIPRU 730k investment firms with assets exceeding £15 billion. All firms subject to FSA’s client asset custody rules (CASS 6) and investment business client money rules (CASS 7) will additionally have to make plans to better protect their client holdings.
When? FSA plans to publish its final rules in early 2012 and expects firms to produce plans by midway through the year. Getting proper plans in place will be a mammoth task. Banks caught by the proposals should be planning now.
The Vickers Report
What? The report from the Independent Commission on Banking (otherwise known as the Vickers Report) recommends:
- the ring-fencing of retail banking activities from other activities;
- capital requirements and loss-absorbency, sometimes above Basel III levels; and
- more transparent and easier account switching.
When? The Report wants the changes “as soon as possible”, and certainly within Basel III timescales.
Financial Crime Prevention
What? Banks have recently had to contend with implementing the Bribery Act into their financial crime prevention procedures. Sanctions regimes update increasingly frequently, and often with a twist so no two regimes are necessarily the same. Banks also have to look forward to changes to the Money Laundering Directive and, possibly sooner, to the Money Laundering Regulations. Add to that FSA’s expectations set out in its Financial Crime Guide and its stated intention to keep fighting financial crime aggressively.
When? Sanctions changes rarely allow any lead-in time, so banks must be confident their procedures can accommodate these changes immediately. The Financial Crime Guide requires regular monitoring of all financial crime risks, and governance is key to this. All banks should review their procedures against the Guide to assess whether any changes are appropriate.
MiFID and Changes to FSMA
What? The European Commission published its proposals for change to the Markets in Financial Instruments Directive (MiFID) in October. The changes to MiFID’s scope, specifically those to bring new instruments, activities and trading venues within its regime, as well as on transparency and trading requirements, will affect banks as well as investment firms.
When? There is extreme pressure to agree MiFID 2 as soon as possible. Once it is adopted, it will lead to significant changes to UK regulation. It is not too early for banks to assess how changes are likely to affect them, and take action to minimise their effects.
Changes to the UK Regulatory Structure
What? The Government is pressing ahead with its plans to reform financial services supervision in the UK. The Bill currently undergoing pre-legislative scrutiny will mean banks and other systemically important financial institutions will be subject to two regulators – the Prudential Regulation Authority for licensing and prudential requirements and the Financial Conduct Authority for conduct of business requirements. There is still uncertainty on how the regulators will work together, and how much duplication of work there will be for dual-regulated institutions who want, for example, to appoint new employees to controlled functions, or vary their permission.
When? The Government is keen to get the structure in place during 2012. Banks should already be assessing whether any proposals so far published will significantly affect them.
And the Rest …
Finally, depending on their business, banks may be affected by changes already in place, or by imminent changes to the laws relating to regulated and alternative investment funds and structured retail products, or by the Retail Distribution Review and the Mortgage Market Review.
2012 will be a time for a watching brief, significant planning and appropriate action.
Law stated as at 17 November 2011