10:37 am - Wednesday June 28, 2017

Banking scenario and regulatory impacts in UK

I was trying to look at the prevailing banking scenario in the United Kingdom. I was surprised to note that the banks in UK have been undergoing considerable changes and challenges necessitated by the environment. I felt that under these circumstances, the banks must be finding it extremely difficult to maintain even their status quo.

In my view, in normal times, the banks managements may be pursuing one of the strategies – Run The Bank, Change The Bank or Empower The Bank. The present banking scenario in UK would be forcing our UK banks to pursue all these strategies together. Naturally the results could be anything ranging from outstanding to disastrous. (Varying degrees of success or failure possibilities exist in between too)

Why so? If one were to look at the factors that challenge the UK banks as listed below, s/he may agree with this observation

Transformation factors

1. Regulatory landscape

Ring fencing – Protect retail banking business from the shocks from potential future crises on account of Investment Banking. Business Operations and Books to be distinct Bifurcation of FSA into FCA and PRA (Financial Conduct Authority and Prudential Regulation Authority). Closer supervision requiring new and extensive reporting EMIR (European Market Infrastructure Regulation) – Operations in OTC Derivatives.

2. Business strategy

Retail Vs Commercial

Retail Vs Investment Banking

3. Reputational repair

Mis-selling of Payment Protection Insurance

Mis-selling of Interest Rate Swap Agreements

LIBOR Fix

Anti Money Laundering

Compensation Bonus Cap (Executive Compensation limits in Europe)

4. Market structure

Ownership changes

Entry of new banks

Reorganization of existing banks

5. European Foreign Transaction Tax

A proposal made by the European Commission to introduce a Financial Transaction Tax by 1-1-2014.

The tax would impact financial transactions between financial institutions charging 0.1% against the exchange of shares and bonds and 0.01% across derivative Contracts, if just one of the financial institutions resides in a member state of the EU FTT.

UK is opposing its introduction if not introduced worldwide

6. Growing demand for analytics

There is a growing demand for extensive use of statistical and quantitative analysis to help banks with understanding the current business trends and gaining insights into future trends using predictive modelling.

Transition factors

1. Transparency and Margin

Historically OTC derivatives trades have been bilateral transactions between two market participants. Emerging regulatory requirements require all OTC derivatives contracts to be traded through electronic platform with price transparency, margin requirements and cleared through a central counter party also known as a derivatives clearing organization and this will provide a transparency into all transactions

2. Wealth Management and Growth

Shifting demographics are presenting present potential new sources of growth for wealth management firms, but success will depend on developing the right strategy for each specific market. The success of wealth managers will depend largely on understanding the unique preferences and priorities of wealthy individuals combined with the regulatory demands and competitive pressures in local markets

3. Sell-side cost pressures

Leading financial firms are increasingly looking for ways to attain post trade processing simplicity while reducing technology costs and risks and enabling easier entry into new asset classes. Multi-asset class trading has exploded as sell side firms utilize a broader array of investment strategies to improve performance and outperform their peers.

4. Electronic Trading and Central Clearing

European Market Infrastructure Regulation requires electronic trading and central clearing of OTC derivatives. Clearing is a post trade activity and aims to reduce risk

5. Product and Process Innovation

The product and process innovation in financial markets is becoming more complex. End user customers require more specific products to meet their needs with processes to suit their conveniences. Competitors are wooing the market place with multiplicity of products and facilitating processes. Regulators prescribe these products and processes to meet certain standards prescribed

6. Counterparty Credit

After the recent counter party credit exposures in the financial market crises, regulators prescribed stringent norms and capital requirements. Hence counter party credit risk management has become a very highly specialized subject requiring a focused approach

Strategic Focus

Naturally the strategic focus of UK banks may cover and comply with the following

1. Build with all client segments in mind. The value proposition and the expectations of these client segments are very different. Naturally we have to create different values for each of these clients. Over time, not understanding the difference results in losing your dream clients

2. Leverage product capability to route to the client segment. Leveraging client focused product capability to drive other income by first identifying existing pockets of strong product capability and then investing in particular client segment focussed products to capture increasing share of the wallet with nil or lower risk

3. Service – Start with finding out which customer segment is under serviced or un-serviced.

4. Compete – Managing Competitors like Metro Bank

5. Simplify – Remove redundancy of processes, operations and technology

6. Model – Global business model including core strategic technologies for common business functions / products.

7. Decision Making – Enable up-to date information on a dynamic basis

8. Risk Aggregation – Across business lines and assets

9. Bench Mark industry best practices

10. Enable Uniform end user experience for customers

11. Empower Relationship Management

12. Facilitate Straight Through Processing

13. Provide technology platform and end-to-end processing capabilities to capabilities to SME’s

14. Re-engineer redundant products and processes to achieve complexity reduction

15. Standardize electronic processing

16. Synergize technology architecture by asset class / aligned business lines

Now one may agree with the observation – UK banks are really undergoing considerable changes and challenges necessitated by the environment.

PS: The above findings are based on my limited reading of UK financial news items, my limited interactions with UK banks and technologists associated with building and servicing UK banks.

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