Regulating the banks: 2014 heralds a tough new approach

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First published for the ICSA on Governance & Compliance’s financial services compliance newsletter.

The start of 2014 has seen the financial regulators begin formal investigations into the troubled Co-operative Bank, following discovery of the £1.5 billion deficit in its balance-sheets in June 2013 and allegations surrounding its Chairman, Paul Flowers.  Whilst the Prudential Regulation Authority (PRA) will consider former senior managers’ roles, the Financial Conduct Authority (FCA) will look at decisions and events to June 2013.  No further details of the investigations have been released.[1]  Alongside three reviews internal to the Co-op, the Treasury will also undertake an independent review via powers under the Financial Services Act 2012 (FSA 2012), examining the actions of relevant authorities, the institution itself, prudential issues, governance and acquisitions.  However, this ‘will not start until it is clear that it will not prejudice any actions that the relevant authorities may take, including the potential FCA and PRA enforcement investigations‘.[2]

More widely, banking structural reform looks likely to dominate regulation in the financial services sector in 2014.  The Government’s Financial Services (Banking Reform) Act (the Act) came into force in December 2013, implementing recommendations from the Independent Commission on Banking and Parliamentary Commission on Banking Standards.  Four key areas form the focus of the ‘transformation’ attempts:

  • Supervision – the Bank of England has been returned to the centre of the supervisory regime, with new powers to identify and address systemic risks as they emerge
  • Structure – new laws separate high street retail banking from wholesale trading to protect taxpayers when mistakes are made
  • Culture – the Government is imposing higher standards of conduct by introducing a criminal sanction for reckless misconduct and a more stringent senior bankers’ approval regime
  • Competition – measures to incentivise innovation and competition within the banking sector will give consumers greater choice and avoid monopolisation.

Whilst the Treasury’s clear intention is to create a stronger and safer banking system[3], practical success remains heavily reliant on the competency of the regulators.  The FCA certainly appears to have begun the New Year with vigour, announcing appointments for an independent review of the Royal Bank of Scotland’s treatment of business customers and authorising ICE Benchmark Administration as the new independent LIBOR administrator, effective from 1 February 2014.  The Act increases the FCA’s regulatory credentials.  The FCA’s competition objective under FSA 2012 is now supported by relevant powers as held by other sector regulators, heightening its ability to ensure competitive markets and delivery of positive consumer outcomes.  Going forward, therefore, the FCA will be able to:

  • address restrictive practices likely to distort, restrict or prevent competition, via orders stopping offending conduct or enforcing fines of up to 10% of worldwide turnover
  • carry out market studies of banks
  • make references to the Competition and Markets Authority, and
  • introduce and enforce rules relating to all domestic payment systems, such as inter-bank schemes and international card schemes.[4]

The FCA’s rigours will also continue to focus on payday lending in 2014.  Although further research, economic analysis and public consultation is necessary before implementation of the Government’s direction to impose a price-cap,[5] the FCA appears committed to ensuring customers receive fairer treatment.  To this end, other measures proposed include:

  • mandatory affordability checks for every loan
  • capping of the number of rollovers to two, and
  • limiting the number of times a lender can seek payment from a linked account.[6]


[1] FCA, ‘Statement on Co-operative Bank enforcement investigation’ (6 January 2014), [accessed: 20 January 2014].

[2] HM Treasury, ‘Chancellor confirms independent inquiry into events at Co-op bank’ (22 November 2013), [accessed: 20 January 2014].

[3] HM Treasury, ‘Chancellor confirms independent inquiry into events at Co-op bank’ (22 November 2013), [accessed: 20 January 2014].

[4] HM Treasury, ‘Banking Reform Bill: government notes on amendments’ (11 December 2013), [accessed: 20 January 2014].

[5] FCA, ‘Letter from Martin Wheatley to Sajid Javid on the payday lending price cap’ (4 December 2013), [accessed: 21 January 2014].

[6] FCA, ‘Statement on a cap on the cost of payday loans’ (26 November 2013), [accessed: 18 December 2013].