It’s now a commonly held belief that a lack of adequate regulation was one of the key causes of the financial crisis. So policymakers have come under considerable pressure in recent years to strengthen regulatory bodies and their powers. 

What’s happening in the UK?

The UK has arguably led the way globally in the reform of financial regulation. The coalition government has undertaken a gradual but significant overhaul of the UK’s financial regulatory system. 

Reform of the FSA

The UK finance industry’s main regulatory body is the Financial Services Authority (FSA). It’s currently being restructured into two separate entities – the Prudential Regulatory Authority (PRA) and the Financial Conduct Authority (FCA). The PRA will focus on whether banks, insurers and investment firms are financially sound, while the FCA will look at how they go about their business – how they interact with other parties and whether they’re obeying the rules that apply to their area of business. The ultimate monitor of the UK financial sector will be the Financial Policy Committee (FPC), an umbrella organisation within the Bank of England that will look at systemic risks across the UK’s financial services industry as a whole. 

These changes to the structure of the FSA have been accompanied by a significantly more aggressive attitude towards breaches of the rules. Earlier this year, the FSA imposed its biggest fine ever – a £290 million fine on Barclays for its involvement in the LIBOR manipulation scandal.

The Vickers report

The other key regulatory step taken by the coalition government after its election in 2010 was the establishment of the Independent Commission on Banking (ICB). The government asked this body to consider why the financial crisis happened and what reforms should be made to the UK’s banking system.

The ICB’s report, which became known as the “Vickers report” after commission chair economist John Vickers, came out in early autumn 2011. Summer 2012 saw the publication of the coalition government’s response.

The government agreed with the ICB that the operations of major high street banks involving the money of ordinary individuals should, with some exceptions, be ring-fenced from their investment banking activities. The government also agreed with the ICB that the amount of capital banks are required to hold in reserve against financial shocks should rise. The third key Vickers proposal that the government accepted for potential implementation is the introduction of measures to increase competition in the UK’s banking sector to both make individual institutions stronger and to ensure the UK continues to be a global leader in the provision of financial services. 

What’s happening in the US?

The approach taken in the US is similar in many ways. Over the past few years, significant new regulation of the banking sector has also been brought in here.

The Dodd-Frank Act

After taking office in January 2009, President Obama wasted little time in proposing a series of radical alterations to the US financial regulatory system. 18 months later, after persistent lobbying by Obama's Democratic Party, the Dodd-Frank Act was passed by Congress. It’s been described as the most significant reform of the US financial sector since President Roosevelt's New Deal provisions, some 75 years previously. The act is named after Chris Dodd and Barney Frank, the two members of Congress responsible for proposing the bill. 

One of the main aspects of the Dodd-Frank Act is the creation of the Financial Stability Oversight Council (FSOC), a government body comprising federal and state regulators that meets regularly to monitor systemic risk to the country's financial system. The Dodd-Frank Act also included increased regulation of the operation of financial markets and increased consumer protections.

The Volcker rule

This rule, part of the Dodd-Frank Act, was named after American economist and former United States Federal Reserve Chairman Paul Volcker who proposed it. It states that banks taking deposits from ordinary individuals will not be allowed to engage in trading on their own behalf. In addition, banks will not be allowed in the future to operate their own trading vehicles such as hedge funds or private equity funds. 

Is there any global regulation?

There is currently no global banking regulatory body. However, several times over the past few decades a committee made up of representatives from central banks and regulatory authorities in the world’s key economies has met in Basel, Switzerland to discuss banking supervision and to attempt to establish a universal framework for banking regulation. 

The result of these meetings has been the Basel Accords – Basel I of 1988, Basel II of 2004 and Basel III of 2010-11. Their main impact has been to propose an increase to banks' reserve requirements – that is, the amount of money they’re required to hold in reserve to ensure they have enough to cover their liabilities if any of the firms they lend to are unable to repay them.  Basel III, devised after the financial crisis, is the most stringent and its requirements are aimed at preventing the domino effect which led to instability across the banking sector following the collapse of Lehman Brothers in 2008. 

However, it’s important to remember that the Basel rules are guidelines only and require implementation by national governments to have any effect.

Timeline

The UK

 February 2010: Chief executive of the FSA, Hector Sants, resigns after prolonged criticism of the FSA in the wake of the financial crisis. He agrees to remain in his position to help oversee reform of the FSA. 

May 2010: A Conservative/Liberal Democrat coalition comes to power. Chancellor George Osbourne announces his plan to reform the FSA. 

June 2010: Osbourne gives further details of his plan, including the creation of the FCA and the PRA.

June 2010: The ICB is established 

September 2011: The ICB issues the Vickers report

June 2012: The coalition government issues its response to the Vickers report.

The US

March 2009: The Obama administration announces plans to create what will become the FSOC. 

June 2009: A preliminary version of the Dodd-Frank bill is put before Congress by President Obama and members of the Democratic Party. 

January 2010: President Obama proposes the Volcker Rule to Congress. 

June 2010: Congress passes the the Dodd–Frank Act.

July 2012: The Volcker rule comes into effect.