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The ripple effect: impact of regulation on the UK finance sector

Impact of regulations on the finance sector

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Since the 2008 financial crisis, government regulators across the world have been working to reduce risks in the finance sector. The focus on regulation is creating a complex environment for finance companies, as national governments look to take more control. Where certain regulations will help protect the stability of financial services, others may not as they’re focused on areas outside the corporate world. Let’s look at the keys areas where changes could arise from this ripple effect.

Bank structure

Of course, there was a whole host of new regulation when the world was hit by the economic crisis. Most of these regulatory reforms were geared towards protecting customers, tax payers and the rest of the economy from another crisis. More recently, the Financial Services (Banking Reform) Act 2013 aimed to improve the support for consumers and businesses, as well as calling for a serious consideration of structural reforms. The UK banking reform has introduced ring-fencing in an attempt to reduce the risk of issues of one banking group affecting another. Conversely, Donald Trump now plans to buck this trend and reduce government involvement in US businesses by reconsidering the Dodd-Frank reforms.

Workload

It’s widely accepted that there will be heavier workloads in financial services as bank executives must find a balance between complying with regulation and recording profits. Also, as it takes time for a business to adapt to new changes, people may have to work harder to ensure that they are carrying out the regulations accordingly. In a survey, 66% of respondents said they expect there to be a noticeable increase in workload due to financial regulation. So, it could either be a case of work longer, work harder or just increase headcount in order to comply.

Tax transparency

With a greater focus on private banking, regulatory changes have dampened the appeal of cross-border banking. Governments world-wide are taking tax transparency very seriously and back in 2013, the US passed the Foreign Account Tax Appliance Act (FACTA). The legislation requires that all US taxpayers and financial institutions, including foreign organisations, file yearly reports on their foreign assets held by US accounts. This law aims to gain more information about all foreign financial income and assets, held by US citizens who invest overseas. The goal is to make sure that citizens aren’t using foreign entities to avoid paying US tax. Also, the bill allows tax withholding if an individual or institution fails to provide the required information.

Countries all over the world are complying with this law, so we could see massive changes to the global tax framework. UK financial institutions, such as Barclays and NatWest, are now imposing this bill. UK banks now have to formally report US customers to local authorities, who are then required to share this information with the IRS. As a result of regulation, there is a greater demand for clarification on the amount of tax businesses pay.

The relationship between banks and corporate companies

Regulation could redefine banking relationships in the finance sector. With new laws and regulations being issued, this will have an impact on how banks do business with their corporate clients. Regulators are taking measures to ensure that banks have enough capital and liquidity to cover loans and cash flow, in the event of another financial crisis. As banks look to manage their personal assets, this could mean that corporate treasurers will look to readjust how they manage their financial operations.

We could see changes in the ways banking institutions and corporate companies work together. There is a new reform called the Supplementary Leverage Ratio (SLR), which is expected to take full effect in 2018. This reform demands that banks must reach a certain SLR ratio, which will have an impact on banks’ decisions to take on loans from other companies. As banks will look to achieve the required SLR, they may be more hesitant to work with corporate companies where there is limited financial return. Regulations mean banks are faced with the challenge of sustaining a profit and managing their balance sheets in line with the regulatory requirements. So, banks will have to consider the value of their clients with more scrutiny.

The well-intentioned introduction of regulation in the market has far reaching consequences beyond the immediate impact on the financial institutions themselves. Time will tell whether the right balance has been struck in ensuring stability and confidence versus profitability and functionality.

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