Barclays 2014 Annual Report Download - page 219

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Proposals to amend the Markets in Financial Instruments Directive
(known as MiFID II) were agreed in January 2014. These amendments
take the form of a directive and a regulation, and will affect many of the
investment markets in which the Group operates and the instruments
in which it trades, and how it transacts with market counterparties and
other customers. Changes to the MiFID regime include the introduction
of a new type of trading venue (the organised trading facility), to
capture non-equity trading that falls outside the current regime.
Investor protections have been strengthened, and new curbs imposed
on high frequency and commodity trading. Pre-and post-trade
transparency has been increased, and a new regime for third country
firms introduced. The changes also include new requirements for
non-discriminatory access to trading venues, central counterparties,
and benchmarks, and harmonised supervisory powers and sanctions
across the EU. Implementation is not expected until late 2016 and
many of the provisions of MiFID II and its accompanying regulation will
be implemented by means of technical standards to be drafted by
ESMA. Some of the impacts on the Group will not be clear until these
technical standards have been adopted.
Structural reform of banking groups
In addition to providing for the bail-in stabilisation power referred to
above, the Banking Reform Act requires, amongst other things: (i) the
separation of the retail and SME deposit-taking activities of UK banks in
the UK and branches of UK banks in the European Economic Area (EEA)
into a legally distinct, operationally separate and economically
independent entity, which will not be permitted to undertake a range of
activities (so called ring-fencing); (ii) the increase of the loss-absorbing
capacity of ring-fenced banks and UK headquartered global
systemically important banks to levels higher than required under CRD
IV and (iii) preference to deposits protected under the Financial
Services Compensation Scheme if a bank enters insolvency.
The Banking Reform Act also implements key recommendations of the
Parliamentary Commission on Banking Standards. Recommendations
that have been implemented include: (i) the establishment of a reserve
power for the PRA to enforce full separation of UK banks under certain
circumstances; (ii) the creation of a “senior managers” regime for
senior individuals in the banking and investment banking sectors to
ensure better accountability for decisions made; (iii) the establishment
of a criminal offence of causing a financial institution to fail; and (iv)
the establishment of a regulator for payment systems.
The Banking Reform Act is primarily an enabling statute which provides
HM Treasury with the requisite powers to implement the policy
underlying the legislation through secondary legislation. Secondary
legislation relating to the ring-fencing of banks has now been passed.
Parts of the secondary legislation became effective on 1 January 2015
and the rest will come into effect on 1 January 2019 by which date UK
banks will be required to be compliant with the structural reform
requirements.
Regulation in the United Kingdom
Recent developments in banking law and regulation in the UK have
been dominated by legislation designed to ring-fence the retail and
SME deposit-taking business of large banks. The content and the
impact of this legislation are outlined above. The Banking Reform Act
put in place a framework for this ring-fencing and secondary legislation
passed in 2014 elaborated on the operation and application of the
ring-fence. It is expected that rules will be consulted on and made by
the PRA and FCA during 2015 and 2016 which will further determine
how ring-fenced banks will be permitted to operate.
In addition to, and complementing an EU-wide stress testing exercise
conducted on a sample of EU banks by the EBA, and in response to
recommendations from the FPC, the Bank of England conducted a
variant of the EU-wide stress test in 2014. The ‘UK variant’ test explored
particular UK macroeconomic vulnerabilities facing the UK banking
system. Key parameters of the test – including the design of the UK
elements of the stress scenario – were designed by the Bank of England
and approved by the FPC and the PRA. Also responding to an FPC
recommendation, the Bank of England and PRA have developed an
approach to annual stress testing of the UK banking system and the
individual institutions within it. The first such exercise took place in 2014.
Both the PRA and the FCA have continued to develop and apply a more
assertive approach to supervision and the application of existing
standards. This may include application of standards that either
anticipate or go beyond requirements established by global or EU
standards, whether in relation to capital, leverage and liquidity,
resolvability and resolution of matters of conduct. In December 2013,
the PRA published its requirements to implement the new European
capital regime, clarifying key policy issues that affect the minimum
level of Common Equity Tier 1 (CET1) capital which banks need to
maintain. The PRA has required banks to meet a 4.5% Pillar 1 CET1
requirement since 1 January 2015, which is up from 4% in 2014.
Similarly, the required Pillar 1 Tier 1 capital ratio has been 6% since
1 January 2015, an increase from the previous level of 5.5%. The PRA
has also required UK banks to bring CET1 in line with the end-point
definition from 1 January 2014 rather than benefiting from transitional
arrangements. Additionally, the PRA has expected eight major UK
banks and building societies including Barclays, to meet a 7% CET1
capital ratio and a 3% Tier 1 leverage ratio (after taking into account
adjustments to risk-weighted assets and CET1 capital deemed
necessary by the PRA) since 1 January 2014, except where – as in the
case for Barclays – the PRA has agreed a plan with the firm to meet the
standards over a longer time frame. Barclays agreed with the PRA that
it would meet this requirement by end-June 2014 at the latest and now
meets this requirement.
The FCA has retained an approach to enforcement based on credible
deterrence that has continued to see significant growth in the size of
regulatory fines. The FCA has focused strongly on conduct risk and on
customer outcomes and will continue to do so. This has included a
focus on the design and operation of products, the behaviour of
customers and the operation of markets. This may impact both the
incidence of conduct costs and increase the cost of remediation. On
1 April 2014 the FCA took over the regulation of consumer credit in the
UK. This is likely to lead to a regulatory regime for consumer credit
which is considerably more intensive and intrusive than was the case
when consumer credit was regulated by the Office of Fair Trading.
In June 2014 the Fair and Effective Markets Review was established by
the Chancellor of the Exchequer. The aim of this review will be to
conduct a forward-looking assessment of the way wholesale financial
markets operate, and propose solutions in order to restore trust in
those markets in the wake of a number of recent high profile abuses,
and to influence the international debate on trading practices. In
connection with the review, a consultation was launched in October
2014 examining what needs to be done to reinforce confidence in the
fairness and effectiveness of the Fixed Income, Currency and
Commodities markets. Representatives from the PRA, the Bank of
England, the FCA and HM Treasury are taking part in the review and
the final recommendations are due to be presented in June 2015.
In July 2014 the FCA consulted on new accountability mechanisms for
individuals working in banks, including the introduction of a new
“Senior Managers Regime” (aimed at a limited number of individuals
with senior management responsibilities within a firm) and a
“Certification Regime” (aimed at assessing and monitoring the fitness
and propriety of a wider range of employees who could pose a risk of
significant harm to the firm or any of its customers). This represents
the implementation of recommendations made by the Parliamentary
Committee on Banking Standards in this area.
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