Splitting up of regulatory responsibilities intended to shore up vulnerabilities.

Reforms are taking place at the international, European and national levels to improve the supervision of banks, especially large, cross-border institutions.

The UK in particular is undergoing a transformation of the regulatory infrastructure, by moving to a ‘twin peaks’ approach to supervision, which will result in the splitting up of the FSA into a conduct and a prudential regulator – the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) respectively.

The former will be a stand-alone institution, while the latter will be a subsidiary of the Bank of England.

“The Prudential Authority will be principles-based and the Financial Conduct Authority will be more rules-based,” Jacqui Hatfield, partner in the Financial Services Regulation practice at Reed Smith LLP in London, told Markets Media.

Combined with its responsibility for macro-prudential oversight through the new Financial Policy Committee, will enable the Bank to identify and monitor emerging risks to the financial system both systemically and at the level of individual firms.

The Bank of England will also have central responsibility in dealing with crises, building on its existing powers under the Special Resolution Regime.

One of the issues under consideration is how tightly should the line be drawn between retail banking and wholesale/investment banking.

The Independent Banking Commission in Sept. 2011 published a report, known as the Vickers Report, which concluded that the best policy approach is to require retail ring-fencing of UK banks, not total separation.

The objective of such a ring-fence would be to isolate those banking activities where continuous provision of service is vital to the economy and to a bank’s customers.

This would require banks’ UK retail activities to be carried out in separate subsidiaries. The UK retail subsidiaries would be legally, economically and operationally separate from the rest of the banking groups to which they belonged.

The aims of insulating UK retail banking from external shocks and of diminishing problems of financial interconnectedness imply that a wide range of services should not be permitted in the ring-fence.

Services should not be provided from within the ring-fence if they are not integral to the provision of payments services to customers in the European Economic Area1 (EEA) or to intermediation between savers and borrowers within the EEA non-financial sector, or if they directly increase the exposure of the ring-fenced bank to global financial markets.

The following activities should not be carried on inside the ring-fence: services to non-EEA customers, services (other than payments services) resulting in exposure to financial customers, ‘trading book’ activities, services relating to secondary markets activity (including the purchases of loans or securities), and derivatives trading (except as necessary for the retail bank prudently to manage its own risk).