The final piece of the biggest reforms to the UK banking sector in a generation came into force today (Thursday 5 March), delivering a key part of the government’s long term economic plan.
The last piece of secondary legislation under the Banking Reform Act 2013 has completed its passage through Parliament, delivering on the government’s commitment to have all elements of its far-reaching banking reform legislation in place by the end of the current Parliamentary term.
The Banking Reform Act is a key part of the government’s plan to create a banking system that supports the economy, customers and small businesses.
The Banking Reform Act implements the recommendations of the Independent Commission on Banking (ICB), set up by the government in 2010 under the chairmanship of Sir John Vickers to consider structural reform of the banking sector.
It also implements key recommendations of the Parliamentary Commission on Banking Standards, which was asked by the government to urgently review professional standards and culture in the banking industry following revelations of attempted LIBOR manipulation in 2012.
The government’s reforms are based on almost 5 years of consultation on the future of the UK’s financial sector and represents the biggest ever overhaul of Britain’s banking system.
Since 2010, the government has acted to transform the banking industry through four key areas of reform:
- supervision: the government has put the Bank of England back at the centre of the supervisory regime, with new powers to identify and address systemic risks as they emerge, ensuring safer banks that are less likely to bring down the economy in the future
- structure: the government has brought forward new laws to separate the branch on the high street from the trading floor in the City to protect taxpayers when things go wrong
- culture: the government is imposing higher standards of conduct on the banking industry by introducing a criminal sanction for reckless misconduct that leads to bank failure, and a more stringent approval regime for senior bankers
- competition: the government is acting to empower consumers by giving them greater choice, which should incentivise innovation and competition within the banking sector
Chancellor George Osborne said:
Today we’ve put in place the final piece of legislation to enact the biggest reforms to Britain’s banks in a generation.
From putting the Bank of England back at the heart of safeguarding financial stability to implementing the recommendations of our Vickers Commission so no bank is too big to fail, we’ve taken the action needed to build a banking system that delivers for Britain in the future.
It’s part of a formidable agenda for economic policy over the years ahead, a long term economic plan for Britain that delivers for hardworking people.
City Minister Andrea Leadsom said:
This is a major milestone and marks the end of a five year process, led by the government, to make the UK banking system stronger and safer so that it can support the economy, help businesses and serve customers.
From the outset the government has built a consensus on this issue and this legislation will deliver crucial changes to the structure of banks. Our reforms are also helping to deliver much need competition in the banking sector and increase the conduct standards amongst bankers.
Sir John Vickers, who chaired the Independent Commission on Banking, said:
The crisis showed the dangers to the economy and public finances of an unstructured banking system with too little capital. Banking reform – notably ring-fencing and greater loss-absorbency – has now set the framework for banks to serve the economy properly in the future.
On 5 March 2014 the Banking Reform Pension Regulations were approved by Parliament. These regulations are the fourth and final piece of legislation required to implement the ‘ring-fencing’ of wholesale from retail banking.
The Banking Reform Pensions Regulations 2015 are the final piece of secondary legislation needed to complete ring-fencing. These regulations ensure that ring-fenced banks cannot be liable for the pension liabilities of other parts of the wider banking group.
These Regulations allow the trustees of the banks pension schemes to make the necessary changes to implement the ring-fencing and also set out the role of the regulators, the Prudential Regulation Authority (PRA) and The Pensions Regulator, for monitoring and assessing the changes made. There was a consultation which closed in October 2014 and HM Treasury has been working closely with industry and with the Regulators developing these regulations. The final versions of the regulations were laid in parliament for debate on 21 January 2015.
Further ring-fencing rules, which do not require legislation, are being put in place by the Prudential Regulation Authority.
As recommended by the ICB, banks are required to have implemented the ring-fence by 2019. They will need to have separated their pension schemes by 2021.