That caps a regulatory shift away from stabilizing balance sheets to making the people behind them accountable through rules on pay, management structures and boards.
As Osborne and Carney prepare to take their case to bankers in two days at the Mansion House dinner in the heart of London’s financial district, they’ll release their overhaul of market conduct.
The Fair and Effective Markets Review, announced a year ago at the same event, is an attempt to stamp out misconduct such as benchmark rigging that has eroded confidence in the financial industry and seen banks pay out billions in fines.
“Without the enforcement and clarity of law, the financial system doesn’t work,” Bill Michael, head of financial services in Europe, Middle East and Africa at KPMG LLP, said in an interview in London.
The annual event at the 18th century Mansion House is often an occasion for grand announcements. In addition to the fair-market review, 2014 saw Osborne give Carney more power over the mortgage market.
It’s also where the chancellor in 2010 tore up the U.K.’s existing regulatory structure and, two years later, unveiled measures with the BOE to boost credit.
Market Scrutiny
While the market review is focused on the fixed income, currency and commodity markets -- on how they’re structured and the penalties and incentives for traders -- it’s not just banks that could feel the effects.
Combining the review, which also examined asset managers and investment funds, with rules for senior bankers could see measures on personal accountability expanded beyond the banking industry.
“There’s an argument for having fewer senior people having more personal responsibility in a proportionate way, which could be exported across U.K. Plc,” said Michael.
“The senior managers regime is a blueprint for responsibility.”
The markets review, according to a preview published last year, seeks to extend bonus restrictions to some non-bank market participants and enforce higher capital levels on firms guilty of conduct or governance failings. At the same time, Osborne is coming under pressure from banks.
The British Bankers’ Association is urging the Treasury to start a formal review of taxes on the industry amid concern HSBC Holdings Plc and Standard Chartered Plc could move overseas to avoid a levy on balance sheets.
Lloyds Stake
The request was made in a letter dated June 3 and obtained by Bloomberg News. Osborne may also give details of what he intends to do with the government’s 80 percent stake in RBS, which the previous Labour government took in 2008 to save the bank from collapse.
RBS shares were down 1.5 percent as of 9:23 a.m. in London on Monday. The push on misconduct “is all borne out of taxpayers bailing out banks,” said Michael.
The Treasury has already started selling its stake in Lloyds Banking Group Plc. The program has recouped about 3.5 billion pounds ($5.3 billion) for the government since December.
As the financial industry pushes back against taxes, it’s also having to contend with the stricter regulatory environment. Carney’s BOE is seeking to implement a suite of rules known as the senior managers’ regime.
The measures increase responsibilities of non-executive directors and introduce potential jail sentences for bankers who take risks leading to the failure of their firm.
‘Big Check’
“The thrust in the past has been on enforcement on the institution, rather than prosecuting individuals. It’s been signing a big check and that’s it,” Anthony Browne, chief executive officer of the BBA, said in an interview in London.
Under the BOE plan, led by its Prudential Regulation Authority unit, banks will need to provide statements of executives’ responsibilities and proof they took all reasonable steps to prevent wrongdoing in the event of misconduct.
The rules are due to take effect by March 2016. Brown says there’s a problem with the application of the new conduct regime. “With a presumption of responsibility, you end up having to create a large audit trail for every little decision,” he said.
“There’s also the extraterritoriality of it, applying across a whole group anywhere rather than just the U.K.” Faced with such issues, banks are considering their options.
HSBC Chief Executive Officer Stuart Gulliver said May 5 that he’s under “significant pressure” from shareholders “who don’t understand the extent to which their dividend and the growth of the company is being set back by what they perceive to be is the wrong location.”
Business Model
HSBC will update investors on Tuesday, and will lay out the criteria to decide whether to move its headquarters abroad. The cumulative rulemaking “is going to prompt a fundamental re-evaluation of the sustainability of business models,” said Michael.
“What you sell, who you sell it to, where your base of operations is, who your regulator is.” There may be no escape. Finance ministers of the Group of Seven nations decided last month to draw up a new global code of conduct, giving Carney’s Financial Stability Board the task.
“Currently a certain number of disparate codes exist in different jurisdictions, and they were often ignored,” Banque de France Governor Christian Noyer said after the Dresden meeting in May. “We need to pull all this together, so that we have a code that is coherent and applicable everywhere.”
bloomberg.com
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