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Tighter banking regulation harm UK’s competitiveness

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Tighter regulation of the banking sector is beginning to harm the UK’s international competitiveness, according to almost two-thirds (62 percent) of senior executives working in the industry polled by Interim Partners, a leading global provider of executive interim managers.

Interim Partners warns that this could enable other global financial services centres to steal a march on the City, with New York seen as posing the biggest threat in terms of competition to London according to 32 percent of banking executives surveyed, followed by Shanghai and Hong Kong (16 percent apiece). For example, just over half (51 percent) of the interim executives in the banking industry believe that new rules to defer bonuses for seven years, which are due to come into force from 2016, are likely to have a material impact on the competitiveness of the UK banking sector.

Angela Hickmore, Partner at Interim Partners, comments: “Remuneration in UK banks is now more highly regulated than in any other major economy. While the financial crisis and subsequent scandals have increased the regulatory burden in other jurisdictions, senior executives in the UK are feeling more pressure than their counterparts anywhere else in the world. There’s a real concern among senior executives that we have now reached the point where these stringent controls are starting to put the banking sector in particular, and UK plc as a whole, at a significant disadvantage on international terrain. That level of regulation cannot come without a cost. New rules requiring bank staff to wait many years for bonuses to pay out could also act as a big incentive for some of the best banking executives to seek out less punitive regimes elsewhere – whether that’s in other parts of the financial services sector or overseas.”

The research found that banking executives viewed the requirement for regulators to authorize business plans and staff as having the worst cost/benefit ratio of any area of regulation on financial services businesses. Banking executives say that the requirement  for “Treat Customers Fairly” reporting has the best balance of cost to the industry versus benefit to consumers. 43 percent of respondents think that having FCA or PRA authorization for business plans and key personnel has the biggest cost impact for the lowest return in terms of consumer protection, criminal deterrence and economic stability. Just 8 percent say the same for the need to collect management information to show they are treating customers fairly.

Interim Partners says that the delays created by the requirement for FCA/PRA to authorise new business plans can reduce competition for consumers, by slowing banks down in their attempts to move into new areas and hindering new entrants coming into the market. They comment that the “Project Innovate” initiative, which is designed to support businesses bringing innovative financial products or services to the market, for instance by helping with applications for authorisation, is helping to redress the balance, but point out that its scope is limited.

Says Angela Hickmore, “Project Innovate is a good start to help get new and progressive ideas moving in the marketplace, but there’s a strong sense that the industry would like to see faster response times applied right across the financial services sector. Identifying which areas of regulation are working well and which are creating a lot of red tape for limited gain is vital to help the UK financial services sector rebuild trust and start to flourish again,” says Angela Hickmore. “While requirements such as FCA or PRA authorization for business plans should help to raise standards and ensure compliance, there’s a sense that the level of bureaucracy and cost involved may have got out of kilter with the value gained.” Areas of regulation interim managers think have the biggest cost impact for lowest return in consumer protection, criminal deterrence and economic stability.

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