UK Banks Face Tough Regulation Amid Calls for Greater Accountability

In a bid to strengthen financial stability, UK regulators have tightened the screws on banking practices, introducing measures aimed at promoting accountability and reducing risk.

Strengthening Governance Structures

Under the Senior Managers and Certification Regime (SMCR), most board members and senior managers are required to obtain regulatory approval before taking up their positions. This involves an assessment of their “fit and proper” status, considering factors such as professional experience and personal integrity.

• The Prudential Regulation Authority (PRA) expects bank boards to include directors with significant financial services experience.
• Chairmen and non-executive directors are preferred to be independent.
• Banks are required to maintain various committees, including audit, nominations, and risk committees. While smaller banks may be exempt from these requirements, the PRA is clear that all institutions must adhere to robust governance structures.

Remuneration Restrictions

Senior managers and material risk-takers face strict remuneration restrictions, aimed at aligning compensation with long-term bank performance.

• Bonuses are subject to deferral, clawback provisions.
• A cap on cash bonuses was removed in 2023.

Internal Controls

The SMCR has placed greater emphasis on individual accountability for senior managers, requiring them to take ownership of their areas of responsibility.

• Senior managers must document role profiles, management responsibilities maps, and hard reporting lines within legal entities.
• Business lines are responsible for identifying and managing regulatory risk, with compliance and risk functions playing a supporting role.
• Internal audit must maintain independence from the business, compliance, and risk functions to ensure objective assessment and challenge.

Outsourcing

Banks are generally permitted to outsource functions, subject to regulatory restrictions.

• Banks must maintain sufficient substance and expertise.
• They must retain regulatory responsibilities.
• Outsourcing arrangements must be documented with robust contractual provisions.

Capital Requirements

UK banks face rigorous capital requirements, designed to mitigate credit, market, and operational risks.

• The PRA calculates capital requirements using the standardized approach or internal models.
• Larger institutions can adopt a more nuanced approach using internal models.
• New and growing banks have historically struggled to obtain approval for internal models, but the PRA is set to introduce a “strong and simple” regime aimed at streamlining prudential requirements.

Liquidity Rules

Banks are also subject to strict liquidity rules, designed to ensure they have sufficient cash or liquid assets to meet their obligations.

• The Liquidity Coverage Ratio requires banks to hold high-quality liquid assets to cover 30 days of stress.
• The Net Stable Funding Ratio ensures that assets are funded by stable capital and liabilities.

As UK regulators continue to scrutinize banking practices, the industry is under pressure to demonstrate greater accountability and resilience in the face of growing challenges.