Barclays 2009 Annual Report Download - page 148

146 Barclays PLC Annual Report 2009 www.barclays.com/annualreport09
Risk management
Supervision and regulation
continued
Barclays US securities broker/dealer, investment advisory and
Investment banking operations are subject to ongoing supervision and
regulation by the SEC, the Financial Industry Regulatory Authority (FINRA)
and other government agencies and self-regulatory organisations as part
of a comprehensive scheme of regulation of all aspects of the securities
business under the US federal and state securities laws. Barclays subsidiaries
in the US are also subject to regulation by applicable federal and state
regulators of their activities in the mortgage servicing business.
Regulatory Developments
In the wake of the financial crisis there will be regulatory change that will
have a substantial impact on all financial institutions, including the Group.
The full extent of this impact and its timing is not yet fully clear, with reform
programmes being developed at global, EU and national level. A programme
to reform the global regulatory framework was agreed by G20 Heads of
Government in April 2009, building on an agreement that had been reached
by the G20 in November 2008. The EU is following a similar programme
of reform following the May 2008 ‘roadmap’ and implementing G20
requirements. There is a substantial degree of commonality to these
programmes covering issues of capital and liquidity regulation, risk
management and accounting standards.
The Financial Stability Board (FSB) has been designated by the G20
as the body responsible for co-ordinating the delivery of the reform
programme. It has initiated work developing guidelines for the supervision
of systemically significant institutions. It is required to present its proposals
to the November 2010 meeting of G20 Heads of Government. The FSB is
also working on approaches to the resolution of systemically significant
institutions that will include the preparation of Recovery and Resolution
Plans, sometimes called ‘living wills’. Further detail is awaited from the FSB,
although the FSA has initiated a pilot project with a group of large UK banks.
In execution of the mandate given by the G20 and the FSB, the Basel
Committee on Banking Supervision has agreed on increased capital
requirements for trading book activities to be introduced from the end
of 2010. In December 2009, the Basel Committee issued proposals for
consultation on enhanced capital and liquidity requirements. These
proposals would refine the definition of regulatory capital to have a greater
focus on core equity, would enhance capital requirements in respect of
counterparty risk, introduce measures to make capital requirements less
procyclical, establish a leverage ratio and require banks to hold greater
buffers of high quality liquid instruments. The Basel Committee will conduct
a quantitative impact study on its proposals in the course of the first half of
2010, with a view to finalising its requirements by the end of the year and
with the aim of commencing the transition to the new capital and liquidity
regime from the end of 2012.
The Basel Committee’s trading book proposals are being implemented
in the EU by amendment to the Capital Requirements Directive (CRD).
The CRD has also been amended to tighten the definition of hybrid capital
and the operation of the large exposures regime in relation to interbank
transactions. The EU has indicated that it will further amend the CRD to
implement revised global standards on capital adequacy and on liquidity
that are being consulted on by the Basel Committee. The EU will also
conduct a Europe-focused quantitative impact study. In addition, other
amendments are being made to the EU framework of directives, including
to the Directive and to the Directive on Deposit Guarantee Schemes. Further
amendments to EU regulatory requirements are likely as the EU develops
its response to the financial crisis, including the structure of the regulatory
system in Europe as proposed in the report of a high-level Commission
group published in February 2009. Among other things, it is proposed by
the end of 2010 to create a European Banking Authority charged with the
development of a single rulebook for banks in the EU. National authorities
will remain responsible for the supervision of financial institutions.
In the UK, the Treasury issued a White Paper ‘Reforming Financial
Markets’ in July 2009 that foreshadowed the introduction of a Financial
Services Bill in November. The Financial Services Bill will, among other
things, create a Council for Financial Stability to co-ordinate the activities of
the UK tripartite authorities (HM Treasury, the FSA and the Bank of England)
to deal with issues related to financial stability and systemic risk. It will also
place a duty on the FSA to make rules requiring financial institutions to
create and maintain Recovery and Resolution plans, require the FSA to make
general rules about remuneration policies of regulated firms, give the FSA a
wider authority to prohibit short selling and permit collective court actions
as a means by which redress can be sought in cases where there has been a
mass failure of practice that has affected significant numbers of consumers.
The Financial Services Bill is currently going through the Parliamentary
process and its likely final shape remains uncertain. In response to the
introduction of the Financial Services Bill, the Conservative Party indicated in
July 2009 that, were it to have a majority following the General Election that
must take place by early June 2010, it would transfer responsibility for
prudential supervision to the Bank of England and create a Consumer
Protection Agency to focus on issues of business conduct.
The Chancellor of the Exchequer commissioned two major reviews
of the regulation of banks that reported in 2009. Lord Turner, the Chairman
of the FSA was requested to undertake a review of banking regulation, while
Sir David Walker was asked to review the corporate governance of financial
institutions.The Turner Review, published in March 2009, sets out a
comprehensive approach to reform the regulation of banks, and for higher
standards of capital, liquidity and risk management. It also sets out a
more intensive and intrusive approach to supervision. This was already in
development as part of the FSA’s Supervisory Enhancement Programme that
has seen an increase in the resources devoted to supervision, the intensity of
supervision and the penalties that may be applied in any enforcement action.
Pending international agreement, the FSA has unilaterally set minimum
capital requirements that are very substantially increased from pre-crisis levels.
Similarly, the FSA is introducing a regulatory liquidity regime in advance
of international agreement on the Basel proposals. The Walker Review,
published in November 2009, sets out proposals for reforms to the corporate
governance of financial institutions. The Financial Services Bill referred to
above will give the FSA enabling powers to implement some of these.
In the United States, as elsewhere, recent market disruptions and
economic conditions have led to numerous proposals for changes to and
significant increases in the regulation of the financial services industry.
These proposals include: possible limitations on the activities of banking
institutions such as prohibitions on engaging in proprietary trading
operations that are not related to serving customers; proposals that would
subject large and systemically important banks and financial institutions to
enhanced regulatory requirements; and financial market and trading
reforms such as the Wall Street Reform and Consumer Protection Act 2009,
which was passed by the US House of Representatives in December 2009
and which would, if enacted, among other things, increase regulation
of over-the-counter derivatives by imposing clearing and execution
requirements on swap dealers and major swap market participants.
However, these and other proposals are still under consideration and there
is uncertainty as to whether and in what forms such proposals ultimately
may be enacted or adopted and therefore what impact they will have on the
Group and its businesses in the United States. The Obama Administration
has also proposed the levying of a Financial Crisis Responsibility Fee (FCRF).
The Administration has said that the FCRF will apply to the US subsidiaries
of a foreign bank or financial company if the consolidated assets of the
US subsidiaries exceed £50bn. As legislation implementing the FCRF has not
yet been proposed, the impact of the FCRF on the Group cannot yet be
determined.
The credit card-related activities of the Group in the US will be
significantly affected by the Credit Card Accountability, Responsibility and
Disclosure Act of 2009 (Credit CARD Act) which was passed by Congress.
The Credit CARD Act will have the effect of restricting many credit card
pricing and marketing practices. Among the numerous provisions, which
come into effect at various times through August 2010, are those that
prohibit increasing rates on existing balances and over limit fees in most
instances, restrict increasing fees and rates prospectively, restrict what
penalty fees can be assessed, regulate how payments are to be allocated
to different balances and how the billing process is to work, and revises all
communications to cardholders.