Structure of UK Banking System

Regulatory Framework—why it is needed?

New banking regulations are formed when old regulations become obsolete and do not satisfy the regulating requirements. Reforms in regulatory system are also necessary in order to minimize business failures and maximize the consumer confidence in system (Ernst & Young, 2012). According to Clifford Chance (2013) financial crisis of 2007 has lead towards reforms in current regulating frameworks around the globe. In UK, the Financial Services Act of 2012 which has been implemented from 1^st April, Financial Services Authority (FSA) has been replaced by two new regulating bodies known as Financial Conduct Authority (FCA) and Prudential Regulating Authority (PRA). Despite these regulatory changes Bank of England, central bank of UK, has still the responsibility of banking sector sustainability in UK and for this purpose Bank of England has created a Financial Policy Committee (FPC) which monitors the sustainability issues in banking industry in the country. Basically this new act of 2012 has replaced the act of the Financial Services and Markets Act (FSMA) 2000.

Banking Regulation Structure in UK

With the passage of time regulatory structure of UK has evolved efficiently and now it has a systematic approach to address regulating issues regarding financial system in the country. In UK, all legislations are developed and passed through parliaments which are strictly abided by government and regulators as well. After this Bank of England, central bank of UK, has the responsibility of maintaining the financial system stability in UK this objective is achieved through its Financial Policy Committee (Bank of England, 2014). Moreover, role of PRA includes monitoring and regulation of banking industry in UK by enforcing regulations in banks, similarly role of FCA is to make sure that interest of consumers in banking industry is protected and their confidence in finical system of country is enhanced by creating competition in market (Clifford Chance, 2013). So, FCA devises strategies which enhance competition among banks on the basis of product/service differentiations.

Figure 1: Role of Regulating Bodies in New Regulatory Structure in UK (Source: Clifford Chance, 2013).

Global Regulating Framework—BASEL III

According to Ernst & Young report (2012) the process of global regulating framework reforms has entered in implementation phase from policy making phase. These reforms are established to encounter global financial crisis in banking industry and to survive in global financial setup, it is also necessary for banking industry to comply with global regulating requirements which are set by BASEL Committee. This committee was formed by G-10 countries and its major concern is enhancement of financial stability and financial supervision in the banking industry around the globe (BIS, 2013). So, this committee has set some standards and every bank must follow these standards to avoid financial uncertainties during financial crisis. 

Currently BASEL III has been implemented worldwide by this committee and these new regulations have improved regulation, supervision and risk management in banking industry. BASEL III has mainly focused on capital, leverage and liquidity requirements (BIS, 2013). Although it has become difficult for banks to fulfill these new strict requirements because they require more capital investment, improved liquidity and reduce leverage, but these regulatory framework will also prove to be safeguard against unnecessary situations for banking industry and it will secure public funds as well (BIS, 2013). Moreover, regulations under BASEL III will be implemented in different stages and some of them will be implemented immediately and some of these will be implemented in near future which will give banks enough time to fulfill those requirements (BIS, 2013).

References

Bankofengland.co.uk., (2014), Bank of England | Financial Stability, [online] Available at: http://www.bankofengland.co.uk/financialstability/Pages/default.aspx [Accessed: 3 Mar 2014].

BIS., (2013), A brief history of the Basel Committee, Basel Committee on Banking Supervision, [report] Bank for International Settlements, 1-9.the-uk/ [Accessed: 3 Mar 2014].

Clifford Chance (2013), A brief overview of the Financial Services Act 2012 and the new UK Financial regulation framework, Clifford Chance, 1-4.

Ernst & Young (2012), Financial Regulatory Reform: What it means for bank business models, [report] Ernst & Young, 1-24.