Beware the unintended consequences of well-meaning banking regulation
FEW RECIPES deliver satisfaction first time. The array of banking reforms assembled in response to the financial crisis have many of the ingredients needed to allow firms to offer the products and services customers want, in a manner that restores trust and confidence to the sector. But some parts still need tweaking if they’re not to leave a sour taste in the mouth.
Financial advice is a good example. Following huge payouts for mis-selling products, the industry must work hard to enhance its offering and improve its record. The more information customers have, the greater their ability to make decisions that are right for them. That is why we have supported changes introduced under the Financial Conduct Authority’s (FCA) Retail Distribution Review (RDR). Helping customers and raising standards are essential elements to rebuilding trust in banks.
But additional costs associated with RDR are resulting in a greater-than-expected reduction in the number of bank-based advisers. Increasingly, customers are having to rely on non-advised or execution-only services to meet their long-term saving needs. This was not the intention of the new regime. No one underestimates the risks associated with a long-term advice gap, so further work is needed to ensure customers have access to the assistance they need.
There are also challenges posed by the increasing drive to clamp down on fraud and financial crime. Banks fully support the need to target fraudsters and criminals, and work closely with the authorities – often acting as the first line of defence against organised crime. But sometimes competing priorities can cause difficulties.
Take the FCA’s plans to draw up new rules to toughen the checks banks put in place when engaging in export financing. The industry agrees that these reforms could be beneficial, but we worry that the burden of the proposed changes could make it hard for SMEs to find banks able to facilitate trade to high risk emerging economies. It is simply not possible to find counterparties in some developing countries who can comply with the level of checks that the new rules would require.
And if banks have to restrict their dealings in these markets to adhere to well-meaning new anti-fraud rules, it could undermine another of the government’s priorities – encouraging exports to the future powerhouses of the global economy. We need to get the balance right.
The same applies to simplifying banking operations by splitting retail and wholesale operations. Under the current proposed arrangements, a few “simple” products find themselves on the wrong side of the electric fence.
Ring-fenced retail banks can offer SMEs “simple” hedging and forex products, but this does not extend to “simple” options. Without the flexibility offered by such products, a SME that buys a forex product, in expectation of an overseas order which then goes astray, will be left without a break clause on the contract.
These are just a few examples of how regulations can have unintended consequences. Making banks safe, improving advice, and clamping down on criminals are all important ingredients to rebuild trust in the banking sector. But as with any recipe, the balance must be right. Consumers and SMEs must not be left worse off.
Anthony Browne is chief executive of the British Bankers’ Association.