Insights: “Trust takes time to establish but minutes to destroy”
Daniel Trinder is Barclays’ Head of Regulatory Relations and Policy for BUK. He explains the importance of the connectivity between banks and regulators, the successes of regulation following the financial crisis – and mitigating the unknowns of Brexit.
Jes Staley has said that “better connectivity with the regulators helps us avoid the next crisis”. What Jes is getting at is that the essence of a supervisor’s job is to understand the risks in the banks that they supervise, and to point out those risks if the bank has failed to notice them. That can happen either through a lack of awareness or intent, or simply through coming at this from a very different perspective. Supervisors will always view things from a broader “public interest” perspective. Jes is saying that by improving supervisors’ understanding of the sector and the banks, we are helping them to be more forward-looking, and we improve the chance that they spot risks earlier, reducing the likelihood of a future crisis.
Connectivity with the regulators helps build trust and credibility – which can take time to establish but minutes to destroy. If you go back to before the crisis, often the first time a regulator would hear about an incoming development would be when they read it in the newspapers. Now they are kept abreast of all key developments and understand the directions and strategies of the banks they regulate.
Not everyone in the industry would agree, but the vast majority of the post-crisis regulation has been good long-term for the banking sector. Prudential regulation has made it safer for banks – so we shouldn’t have Northern Rock-type liquidity problems. Markets and conduct regulation have made markets and products more transparent and simpler, so there should be fewer bubbles building up over time. But the regulatory regime has had areas where, even policymakers admit, the regime is not 100% fit for purpose. It needs continual fine-tuning, but most of the really big-ticket areas – prudential, structural reform, resolution, derivative reform – have been done and put together relatively well.
Top of the agenda
Historically, there are periods of intense new regulation and then, when regulators realise the full implications of those regulations, the fine-tuning of rules to account for unforeseen circumstances. Regulators also have a tendency to pick on particular themes or topics that are often driven by shifts in political or societal preferences, such as protecting vulnerable customers, or transparency. Where regulators use regulation in a way to pit one business model against another, the implications can be dramatic. EU Legislation MiFID I opened up stock exchanges to competition and more recently Open Banking has just opened up banks to competition for payments. Customers have yet to wake up to what Open Banking means for them, so, as far as I’m concerned, the jury is still out on the implications for payments.
Changes to the regulatory framework and the reaction of our supervisors are event-driven. Once something happens you usually get a plethora of uncoordinated activity as regulators react to the new world. Multiple regulators in the UK currently have fair pricing and customer vulnerability at the top of their agenda. To complicate matters further, as the regulatory framework evolves, our supervisors are looking at these issues through both a conduct and competition perspective with, at the same time, eyes on both supervision and the expectation we address historical failings.
So, if you go back to the financial crisis, we had regulatory frameworks like Basel III, OTC derivatives reform, and the Dodd-Frank Act in the US, where everything was about shifting the balance in favour of financial stability and consumer protection. We are currently getting a lot of regulatory proposals around protecting consumer vulnerability and new technology and the use of data – which are key to the way in which banks are adjusting their business models going forward.
Before the crisis, often the first time a regulator would hear about an incoming development was when they read it in the newspapers. Now they are kept abreast of all key developments and understand the direction and strategies of the banks they regulate
Devil in the detail
With Brexit, however it pans out, there is no detail yet on financial services. European regulation of financial services is incredibly detailed. The Markets in Financial Instruments Directive (MiFID) II, for example, is over 4,000 pages long – and that’s just one piece of regulation. The devil is always going to be in the detail and as yet we don’t have any. Until the political uncertainty is over, regulators will be unable to put detailed rules in. Until these rules are in place we have no option but to assume a hard Brexit and no passporting rights to service our customers in European Economic Area countries. The good news is that Barclays has always planned and executed against a hard Brexit from the outset. All license authorisations have been received for the expanded Barclays Bank Ireland entity (BBI) which ensures that any unforeseen circumstances will be minimal.
Other things that worry me are fraud, scams and cyber-attacks. We share a common goal with our supervisors to detect, prevent and ultimately prosecute the offenders, but staying one step ahead of increasingly sophisticated criminals deploying the latest technology is challenging. A side effect of Open Banking – one of the issues key for the industry – is what it means for fraud and scams. Regulators also have to ensure that, with banks switching their IT onto cloud platforms, they’re not just shifting problems elsewhere.
The key to ensuring the framework of regulations is fit for purpose is through the public consultation process. When the landscape for banking continually evolves, asking the right questions at the right time and consulting the right market participants can be challenging for regulators. Regulators need to be quite humble in being willing to realise that they will not always get things right and must be able to adapt rules over time. If the regulation doesn’t meet its full intention, have the humility to change it. A lot of good regulators realise this but they need banks like Barclays to continually remind them what works well and what could work better.