Author: Huw Jones, Director, Leathwaite

Ever since the Financial Services Authority (FSA) took on its new form as the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) in 2013, the industry has been buffeted by waves of consultations, guidance and regulation by an empowered and activist regulator. While many firms are still reeling from the amount of change that’s taken place in the past year alone, they must brace themselves for more on the horizon. In this article we take a snapshot look at some of the key pieces of regulation that will be high on the agenda in 2015. 

1) The Approved Persons Regime – Importance: High

What:

  •  New regulation which changes the way individuals are registered with regulators and adds unprecedented personal liability to individuals in leadership positions.

When: Ongoing 

What it means in 2015:

  • Increasing personal accountability for the actions of the whole firm means senior roles will come with a higher personal risk factor which will undoubtedly make them less appealing.
  • This risk is not only to a candidate’s reputation and career but also to his or her finances through fines and more severe enforcement actions such as prison sentences.
  • Employees will now be subject to the reverse burden of proof: This ‘guilty unless proven innocent’ standard will mean that senior roles which are perceived as having higher risk, such as Money Laundering Report Officer, are much less appealing.
  • As a result, firms will have a challenge in finding compliance officers with the relevant experience to manage this transition. Strong compliance officers in this space will be in high demand.
  • Approved people in any function in the bank may well jump ship to a less stringently regulated part of the financial services industry such as hedge funds or private equity. 

2) The Bank Recovery and Resolution (BRR) order – Importance: High

What:

  • New sanctions designed to mitigate the problem of ‘too big to fail’ institutions with a particular focus on credit.
  • The regulation is predominantly affecting risk & compliance functions possibly forcing restructures.

When: The 6th Jan 2015 deadline for restructuring plans has now passed 

What it means in 2015:

  • The BRR is similar to the recently introduced RRP in the U.S. It’s safe to assume many firms will be looking across the Atlantic to see what best practice can be gathered from across the pond.
  • The ring-fencing of areas within a bank could create new job opportunities for people in all parts of governance and remove some of the economies of scale that large banking groups enjoy. 

3) Introduction of the Payment Systems Regulator (PSR) – Importance: Moderate

What:

  • The introduction of a new regulator to oversee UK payment systems, covering banks and payment service providers such as MasterCard, Visa and Paypal as well as payments infrastructure providers such as Vocalink. 

When: The PSR is due to become operational in April 2015.

What it means in 2015:

  • There are several updates still to come regarding how the new PSR will operate, such as:
    • How the new regulator will monitor and enforce payment systems.
    • What the timeline will be for any major changes being rolled out.
  • In preparation, a surge of hiring within the payment technologies space can be expected to continue, as firms get ready for increased scrutiny.

4) CRD IV and banker salaries – Importance: Moderate 

What:

  • Capital regulation CRD IV will continue to impact how banks design their remuneration schemes, aiming to keep bonus schemes in check.

When: Ongoing

What it means in 2015:

  • As the regulation limits bonuses to 1xbase salary (or 2xbase salary with shareholder sign off), banks will continue to increase base salaries for staff who have historically been paid bonuses that were several multiples of their base salary.
  • This will have the unintended effect of making banks less financially secure as their fixed costs will increase considerably as, even in a bad year, they will have to pay out large sums of compensation to staff.

5) EU Data Protection Reform – Importance: Moderate

What:

  • The EU data protection directive was adopted in 1995 and was superseded in 2012 with new European General Data Protection Regulation.
  • 2015 will see a continuation of reforms aimed at ensuring that financial services obey best practice in handling personal data.

When: The reforms due to come out at the end of 2014 have been postponed until March 2015. Banking institutions currently have until 1st Jan 2016 to comply with the new rules.

What it means in 2015:

  • Meeting the regulation needs a two-pronged approach;
    • Firms will have to invest to ensure they have the right technology to track, protect and destroy client data; and
    • Company leadership must ensure they remain well briefed on trends in cyber-crime and the importance of securing personal data.
  • For the banks this is not just about hiring large numbers of Cyber-Crime/Information Security experts it will also require increasing awareness and making key conduct and cultural changes across the firm.
  • The delay to the introduction of the EU data protection directive was welcome news for banks struggling to cope with waves of regulation elsewhere in their business, but a 2016 deadline means that 2015 is no time for banks to be complacent.

6) Consumer credit – price caps on payday lenders – Importance: High

What:

  • Consumer credit was formerly regulated by the Office of Fair Trading, and is now under the purview of the FCA.
  • This has resulted in high profile reform primarily affecting pay-day-loan companies. New regulation will include:
    • A cap on APRs requiring far greater transparency.
    • Intense and sustained scrutiny by regulators, and threats of significant fines.

When: This regulation came into effect 2nd Jan 2015.

What it means in 2015:

  • Short term unsecured lending providers and their peers will likely be facing difficult decisions between major restructuring and possibly even exiting the market. As the impact of regulation is felt, management will be under considerable pressure to make the right moves.
  • Where restructuring occurs, pay-day lenders will be hungry for as much trained compliance talent as they can find, and will likely implement extensive training for staff in this area as well.
  • In addition to pay-day-lending firms, the increased regulation in the consumer credit will also have an impact, albeit less a less significant one, on mainstream lenders such as large retail banks.