Financial Regulations from Reactive to Proactive

In the UK, the financial services sector is regulated by the Financial Services Authority (FSA), including banking services, general insurance and mortgages. The FSA is charged with maintaining market confidence, promoting public understanding of the financial system, securing an appropriate degree of protection for customers and fighting financial crime.

Regulation being strengthened

Since the global financial crisis became apparent, the UK has taken a number of steps to reform this sector. In March 2009, the government published a regulatory review of the global financial crisis in which it acknowledged that light touch regulation by the FSA had failed and that reforms would be made, concentrating on macroeconomic regulation and increased scrutiny of individual companies. In the past, the FSA tended to take a reactive stance. For example, in terms of consumer protection, it used to wait for evidence that a product was being mis-sold. In the future, it will take a more active role in product development. It will also engage in more intensive supervision of financial firms and will take tougher action against transgressors.

In November 2009, the UK government introduced the Financial Services Bill, which proposes reforms that will strengthen financial regulation, support better corporate governance and empower customers. The bill makes provision for the establishment of a Council for Financial Stability that will focus on managing systemic risk and protecting financial stability. For financial services institutions, the bill introduces the need for them to put in place Recovery and Resolution Plans, or living wills, to outline how they will deal with periods of stress and reduce the risk of failure. Among measures being taken are those for ensuing greater transparency of salaries in the financial sector and to place curbs on excessive bonuses in the face of public pressure.

In March 2010, stricter stress testing measures were introduced for banks to ensure they are able to survive a further four years of failing economic growth and a 13.3% unemployment rate in order to ensure that they maintain sufficient capital. It had been announced in late 2009 that new liquidity requirements would be imposed on financial services institutions, but the FSA stated in March 2010 that it would not require banks to abide by tougher laws for the time being—at least until the economic recovery is assured.

Items on the policy agenda focus on restraining risk-taking activities, improving the resilience of financial systems to risk to ensure continuity of key functions in the event of stress, and improving arrangements for dealing with financial problems as they occur. Since they will be facing greater scrutiny in the future, financial institutions should ensure that they have their own houses in order by taking action to reduce their exposure to risk and so that they can be sure they are able to comply with not only current regulations, but any new measures that are put in place.

Further reforms will be imposed

In terms of corporate governance, the FSA states that the financial crisis has exposed significant shortcomings in governance and risk management across numerous sectors of the financial services market. In particular, it raised issues in a number of areas, including where boards did not sufficiently understand their firm’s business models, where boards needed a better understanding of higher risk activities and products, and where boards did not receive appropriate management information to be able to carry out their important oversight role.

Because of issues such as these, the FSA will impose greater scrutiny on individuals before and while they are in a position of influence, including roles such as chairman, senior independent directors, chairman of the risk, audit or remuneration committee, and finance, risk and internal audit functions. It states that good governance is about managing the risk that the firm faces and the board must have a clear understanding of the firm’s risk appetite to ensure that a robust control framework is put in place to manage those risks. As well as taking more of a supervisory approach, the FSA has created a code of practice that ensures that the firm’s remuneration policies promote effective risk management. It is set to publish a further consultation paper later this year which might see the code extended to other firms in the sector beyond banks, with any suggested measures taking account of international developments in this area. This consultation paper will focus on the intensification of the approved persons regime for board positions and will focus on implementation of recommendations from the Walker Review that was conducted, especially in the areas of risk governance and the strengthening of governance frameworks.

Regulatory compliance requires a proactive approach

However, given the vast number of regulations that this sector already faces and the need to take into account new legislation that will almost certainly imposed in the future, ensuring that they are in compliance is a daunting task for any organisation, especially if the compliance process is handled in an ad hoc or manual manner. Far better is to look for technology that handles the processes required in an automated fashion, allowing for the requirements of multiple regulations to be met. Essential elements that should be included in any technology for aiding in compliance are the automated and secure creation, archiving and management of all business documents, policies and procedures management, reporting and audit capabilities, and e-learning modules for user training and awareness.

New rules being imposed on the financial sector are seeing the FSA take a much more proactive stance with regard to regulatory transgressions. Financial services institutions should respond to this by ensuring that they also take a proactive approach by putting in place tools that allow them to be sure that the assets of their organisation are adequately protected and that their houses are in order.