The development of the U.K.’s regulatory framework for financial services has resulted in multiple public-sector bodies regulating the sector in ways that frequently overlap, warns the country’s leading banking lobby group.
UK Finance also says the scale of firms’ interactions with numerous regulators—including non-financial bodies such as the Information Commissioner’s Office, the country’s data protection authority—is “extensive” and regulatory change now accounts for increasing operational risk in the financial services system, as well as for a significant chunk of firms’ budgets—so much so that regulatory compliance costs are crowding out funds available for innovation and growth.
Additionally, “voluntary” industry initiatives pushed by regulators to promote “best practice” also add to firms’ compliance burdens and costs, says UK Finance, and should therefore be coordinated on the same basis as regulations and rules.
In its response to the Treasury’s call for evidence for its review of regulatory coordination—made publicly available for the first time Monday—UK Finance said effective coordination between regulatory bodies is “vital” to ensure financial stability and to maximize benefits to consumers but warned the banking and finance sector “has become increasingly concerned that such coordination is not being achieved in practice.”
As an example, UK Finance says during December 2018 there were 24 live consultations in progress among the country’s main financial services regulators on issues as varied (and pressing) as Brexit and climate change. The timing—just before the Christmas holidays and traditionally one of the busiest months for the sector—meant some firms may have found it difficult to provide any response.
The document suggests better coordination will result in regulatory outcomes delivered more efficiently and with lower and/or better managed compliance costs and resource requirements for firms. Furthermore, better regulatory coordination would leave the United Kingdom better placed to determine the regulatory framework for banking and finance after it leaves the European Union (due to take place Jan. 31).
Some 50 firms helped shape UK Finance’s response. Of those, almost all that engage with U.K. regulators see scope for the existing levels of coordination between them to be improved— for some, significantly so.
Oversight of the financial services sector has been tightened following the 2008 crisis, particularly since the regulatory environment at the time of the crash was regarded as too “light touch.” But UK Finance suggests the pendulum has since swung too far the other way and compliance requirements have become unduly onerous.
It estimates, for example, on average a U.K. bank now receives around 18 publications a week from regulators that it needs to check it is in compliance with, while one of the firms that responded to its request for comments says it makes roughly 25,000 IT changes each month—half of which are mandated by regulatory requirements and all of which carry a degree of operational risk.
Some firms estimate compliance requirements have accounted for over 30 percent of their total costs between 2015 and 2018.
There have been calls for a loosening of the rules to ensure London retains a pivotal position as a major financial center. The European Union has warned, however, it stands ready to cut off the United Kingdom’s access to the single market unless London maintains rules broadly aligned with the bloc’s own.
To improve the current situation, UK Finance recommends that:
- The Treasury establishes a strategy and policy statement that provides context and guidance about priorities and desired outcomes over the medium-term (specifically in the banking and finance sector) and clarifies the respective roles of regulators and government;
- U.K. regulators define, deliver, and demonstrate intended consumer outcomes;
- Cost/benefit analyses take account of relevant activities by other public bodies and be subject more routinely to consideration by an external, independent body with appropriate expertise and stakeholder participation; and
- U.K. regulators collaborate on a shared business plan setting out upcoming issues cutting across their individual responsibilities. The plan should be owned by an “air-traffic control mechanism” to manage the cumulative impact of regulatory change emanating from different sources. At a minimum, it should comprise the Treasury, the Bank of England, the Prudential Regulation Authority, the Financial Conduct Authority, the Payment Systems Regulator, and the Competition and Markets Authority, with the participation of other bodies as appropriate and the direct involvement of stakeholders. It should also consider longer-term and strategic issues that impact the banking and finance sector as a whole.
The Treasury launched its review into U.K. oversight of the financial services sector last July as part of the government’s plan to ensure the country remains globally competitive after Brexit. The Treasury plans to respond to the consultation later this year. It is then planning a second phase that will look at how the regulatory regime needs to change once the United Kingdom leaves the European Union.