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What does the future hold for the financial services sector? How will proposed new regulations affect it, especially in the UK? And what about the rise of emerging markets and their ever-growing financial clout?

David Buik, partner at BGC Partners, and a team at PwC, led by Andrew Gray, UK banking leader, answered your questions.

Scroll down to read questions and answers.

Read the Future of Financial Services report in full here.


How would the proposed idea of breaking up the universal banks in the UK help stabilise the country’s financial services sector? I have doubts as most US banks are more or less universal after the Lehman Brothers collapse (except for Goldman Sachs and Morgan Stanley, both of which are bank holding companies). Most European investment banks are also part of universal banks. In a world where many aspects of the economy, not least the financial services, are globalised, the UK’s attempt seems rather naive, especially since the country’s economy relies heavily on the wellbeing of the City.

Jennifer Tae, London, UK

David Buik: I think it is very unlikely that all international banks in the UK, apart from European banks, will be broken up. In the case of US banks, I suspect that it will just be proprietary trading that will be segregated. UK banks are under a threat of being split into consumer and investment banking units. This would be a disaster and would damage the recovery process of the UK economy. Boring Bank plc would have great difficulty raising fresh capital. Investors need the smell of the chase and therefore a certain amount of risk to attract their capital. More capital should be appropriated to the investment of division than to retail banking on a pro rata basis.

Andrew Gray: A thorough and rigorous review of the UK banking sector is to be supported. The issues are complex – the industry needs to develop and respond to the challenges of the past few years, and the review should be sufficiently broad to consider all key issues.

The Independent Commission on Banking is looking at both the ability to limit the potential of another banking crisis, as well as the impact of any such crisis should one occur. While splitting banks up may not reduce the risk of failure – indeed, in some situations the risk of failure may rise – it may help a supervisor monitor banking activity and limit such activity to reduce the risks. However, such powers already exist and are being strengthened under the proposed capital reforms of Basel III.


How likely is it that some of the UK’s big banks will move their headquarters abroad if proposed regulation would lead to them being broken up? Is this simply a bargaining position?

John, London, UK

DB: The threat is much greater than our politicians care to give credit for. Messrs Cable, Darling et al say they don’t care! They should. Moving key staff (100 or so) plus capital is relatively inexpensive. Several key players have left the employ of the investment banking division of RBS and are now set up for Nomura in Singapore with the minimum of fuss and very much to Nomura’s benefit.

Politicians and observers are being naive if they do not think that HSBC, Barclays and Standard Chartered have not made contingency plans. Shareholder value must be delivered and if the tax regime in the UK remains unappetising, they will move their necessary operations. Give the Vickers commission [the Independent Commission on Banking, led by Sir John Vickers] the intelligence of realising a very real threat.

AG: A number of banks have stated they are looking at options to relocate overseas if they don’t like the outcome of the Independent Commission on Banking. However, no bank has yet relocated overseas as a result of discussions to date. Banks, like all public companies, have an obligation to protect shareholders’ interests. The commission has only just issued its “call for evidence” paper, and without knowing the results of the commission, it is impossible to predict how the banks will respond.


Should proprietary trading be banned in the UK?

Andy Jackson, Birmingham, UK

DB: Certainly not! It’s all a question of keeping propriety trading on the bridle. They need to be properly regulated with sufficient capital, with also an element of unlimited liability for each trading operation. This will sort the men out from the boys. In so many words, if a proprietary trading operation wants to “take a cut at it” and back its judgment in an aggressive manner, then it must know the consequences if the investment decision turns out to be folly.

AG: In short, no. The world of financial services requires risks to be transferred from one party to another. In doing so, this can valuably reduce the overall risks for both parties and enables economic wealth creation. Challenges occur when risks are taken on a purely speculative basis and are disproportionate to the underlying activity of a bank.

Preventing proprietary trading would restrict many banks’ ability to service their clients effectively. Current initiatives that may limit proprietary trading by banks, as well as ensure they hold sufficient capital against the risks they take, are an appropriate and balanced response.


Mark Hoban, financial secretary to the Treasury, says the financial services industry in the UK “needs to speak out in favour of effective, proportionate regulation rather than fear that by doing so it will encourage policymakers to go further”. No one denies that a change in regulation is needed – how can the industry help ensure that changes are indeed balanced and do not create an impossible business landscape?

Jerry, Manchester, UK

DB: I think what Mark Hoban is saying is, “the financial sector must be proactive in terms of regulatory changes rather than responding in a negative fashion to suggestions made by politicians in general, the government and regulators”.

He is absolutely right. No one from the financial sector is under any illusion that changes in regulation need to be implemented, particularly an increase in capital requirements, and the sooner they are made the better. However, what market protagonists are concerned about is overregulation, or to use the vernacular, throwing the baby out with the bath water. Bank regulation is overdue by at least six months. Basel III has taken too long to make its recommendations. Global regulation is also nonsensical. It is high time the UK government recognised this fact and regulated banks accordingly to suit their individual criteria.

David Kenmir, director of financial services regulation practice at PwC: The regulatory pendulum has swung a long way in the past few years with regulation becoming more intrusive and less trusting. Due to the global nature of the financial services world, it is critical to ensure a level playing field is maintained – draconian regulations run the risk of affecting the competitive position of the UK financial services industry.

The industry needs to represent itself effectively to politicians and regulators in the UK and Europe. In doing so, it needs to be analytical in its responses, rather than emotional, and to substantiate its arguments with hard facts wherever possible. Historically, the financial services industry has sometimes been slow to engage with emerging regulatory initiatives, it will get better results if it engages earlier in the process.

Politicians and regulators need to listen carefully and be open-minded to the arguments put forward by the industry.


Should hedge funds be banned?

Patrick, Switzerland

DB: Absolutely not! I couldn’t think of a more negative attitude. Let’s face it: hedge funds never destroyed themselves in the credit crisis. They kept their heads above water. People only remember the bad times. Hedge funds have made a phenomenal contribution to providing very necessary liquidity to equity markets; without their input, the damage to share prices would have been much greater. Yes, they have “shorted” financial stocks, but the damage done to the market by their action was significantly less than the damage caused by the downbeat mood and a loss of confidence in the market place at the time.

AG: An outright ban on hedge funds is neither practical nor desirable. If hedge funds are appropriately controlled, they provide investment vehicles for people wishing to take certain risks. As with all financial service products, there is a need to ensure sufficient transparency to enable the potential systemic risks to be understood and addressed by market regulators. Additionally, there is a need to have adequate investor protection to ensure only the more sophisticated investors, who understand the risks, invest in such complex and higher-risk products.


If the Conservative-Liberal Democrat coalition in the UK falls apart and Labour comes to power with the election of Ed Miliband over the weekend, how will a supposed lurch to the left affect fiscal and monetary policy?

Hugh, London, UK

DB: The coalition has had a small result with Ed Miliband being elected as Labour leader. David Miliband, conversely, has gravitas and charisma. The market is less than convinced that “Red Ed” has. However, he may be a bit of a chameleon who knows exactly how many beans make four.

New Labour is no longer. But in the event of the coalition coming under the cosh as a result of draconian public expenditure cuts and thus losing support, we shall see how adroit Ed is at handling the slippery-eel-like qualities of the Trades Union Congress and its associates. Labour has lurched to the left but has yet to lose its political balance. Can Ed provide a credible alternative government? I think he lacks judgment and experience. If David were leader and the coalition fell apart, I would be worried.


So far, the debate has concerned the nature and form of emerging regulatory reforms proposed by different bodies. With the recent BIS and Basel Committee on Banking Supervision announcements and the proposals from the Treasury, together with the initial comments from Sir John Vickers, what do you think are the key implications for retail banking in the UK?

On a secondary theme, with the implementation timeframes outlined in the recent BIS announcements going out to 2018 in some cases and with Vickers’ final report not due for a further 12 months, it seems to me that the lobbyists have done well to water down proposals and have a further opportunity to work on UK regulators. Do you think there is support for the view that disaster myopia is increasingly likely to see reforms in a watered-down form and that the dialectic of regulation is in evidence?

Andrew Dale, London, UK

DB: First, frustration is the only word that adequately describes the feeling in the City and Canary Wharf. To agree legislation and regulation for banks on a global basis is unworkable. I am confident that the BIS, the Basel committee, the Treasury and the Vickers commission have given or will give it their best shot. However, the fact remains that the criteria for US banks are totally different from those in the UK, Europe, Asia or Japan. To start with, sub-prime lending caused the demise of US banks; poor credit judgment was the ruination of a few UK banks and it was a combination of both in Europe. Without being disrespectful, Paris, Frankfurt, Rome, Brussels and Madrid are all financially Mickey Mouse centres compared with London. Therefore, our regulatory requirements should be different.

What are the implications from the Vickers commission’s early comments for retail banking? The only positive outcome will be for the benefit of the consumer who will receive better treatment, and not before time. Also, the question of competition will get a good hearing. Virgin, Tesco, Metro, Uncle Tom Cobleigh will all have a chance. But banking is complex and competitive, and make no mistake, big is beautiful. If banks are big, they will be in a position to respond in a pioneering manner to the requirements of small and medium-sized enterprises. The smaller the bank, the less risk it can take.

Second, the time frames are absurd. To be given eight years to get your capital requirements in order is nonsense. Well done to the German banks for gaining this dispensation. Seven per cent tier-one capital is hardly onerous. UK banks already have double-figure tier-one capital, which goes to show what good shape our banks are in, compared with many of their peers. Yes, before I receive a thousand emails, the taxpayers will get their money back from RBS and Lloyds.

AG: There is widespread recognition that the current regulatory environment needs to be enhanced. Knee-jerk reactions are likely to result in unforeseen consequences and may not address the significant issues. As with any attempt to improve the global regulatory environment, it is important to allow sufficient time for individual regulators to implement changes in a consistent way to maintain, as far as possible, a level playing field.

The Basel III proposals will require additional capital levels for risk-weighted assets, so it is likely that the higher-risk activities of investment banks will attract greater additional capital than lower-risk retail banking activities. As such, retail banking in the UK is much more dependent on the underlying performance of the economy than on potential changes in capital requirements. The Independent Commission on Banking has identified a number of significant questions that need to be addressed. While there may be some potential benefits to splitting banks’ activities, should the commission require the separation of retail and investment banking activities, this is likely to increase the cost of providing some banking services to customers.

Copyright The Financial Times Limited 2017. All rights reserved.
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