Regulatory themes for UK retail banking in 2019 - Minds made for building financial services - EY
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Regulatory themes for UK retail banking in 2019 Minds made for building financial services
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1 Regulatory themes for UK retail banking in 2019
Contents
Executive summary 1
Key themes underlying the UK regulatory agenda 2
Savings, payments and current accounts 4
Lending 4
Distribution 5
Problem resolution 5
Governance and control 6
How we can help 7
Regulatory themes for UK retail banking in 2019
Executive summary
The regulatory regime for UK retail banks is in a state of flux.
Globally, regulatory policy priorities are broadening to
encompass not just the post-crisis reform agenda, but also
a new set of emerging risks that are highly topical to the
UK market. These include, technological innovation, rapidly
changing customer behaviour, new market participants and
evolving business models. They sit alongside an enhanced focus
by both regulators and boards on sustainable business models
that reflect business purpose and a renewed commitment to
sound ethical practices. Taken together, this sets an agenda
John Liver for transformation for UK retail banks in 2019, and that’s even
Co-Chair, EY Global before the risks of any wider political change are considered.
Regulatory Network
So how do banks react?
Firstly, they need to use this regulatory agenda to help frame
their business priorities for the next few years. But they should
also see a wider opportunity to embrace the themes discussed
in this report as part of a strategic evolution that can help
differentiate themselves from peers.
1 Regulatory themes for UK retail banking in 2019
Overview of underlying UK
regulatory themes
The priority regulatory themes for retail banks include a number These themes must also reflect the technology revolution, which
of key topics: is becoming increasingly widespread, and creates transformational
UK focussed, new ringfenced banks opportunities and risks for the sector and for individual players.
►► Newly established ringfenced banks need to demonstrate that Key regulatory areas of focus include:
they are sustainable, independent institutions and that they Data access and Open Banking
are viable, resolvable if needs be, and fulfilling their purpose ►► Desire to seize the benefits of automation and innovation,
of financing the real economy at a time when the global including opportunities of new competition and access to
economic cycle may be approaching a downturn. There is a customer data through Open Banking and PSD2, whilst being
risk of particular turbulence in the UK economy on which these vigilant to the potential risks.
institutions are now more explicitly focussed.
►► Challenges in considering the potential for regulatory arbitrage
Choice, competition, value and fair pricing as new entrants compete for elements of bank business — but
►► Trust and reliability, including operational resilience that without being banks and therefore subject to an equivalent
recognizes the interconnectivity of retail banking in the weight of regulatory and supervisory standards.
financial system. Automation, analytics and product tailoring
►► Greater customer choice and strengthened competition in ►► Increasingly pervasive use of automation, data analytics and
retail banking. cloud. Plus, the emergence of machine learning and artificial
►► Improved value, with a concern about the fairness of intelligence to drive product development, servicing and
differentiated front/back book pricing (the “loyalty penalty”) in support activities, and control and risk management.
banking and insurance products, and fair pricing more broadly. ►► Regulators looking to leverage the benefits of these tools
►► Banks to enhance their understanding and management of to strengthen the effectiveness and efficiency of their own
direct and indirect exposures to financial risks arising from activities. Short-term priority areas include financial crime and
climate change. regulatory reporting; over time we expect a broader impact on
Demographics and employment patterns the regulatory landscape.
►► Customer propositions to reflect changes in demographics ►► Data-driven tailoring of product features and pricing to specific
and workforce dynamics — new demands of customers for groups of consumers, and the related ethical questions that
rapid service at their convenience, the ageing population, is now starting to raise, including the need to identify and
the increase in zero-hours contracts, and other forms of less appropriately treat vulnerable customers and continue to
regular employment. provide access.
Vulnerability Ecosystem business models and third-party management
►► Proactive steps to deal fairly with customers who may be ►► Need to manage and control effectively the increasingly
considered vulnerable, whether as result of mental or physical networked “ecosystem” business models that are being
health conditions, low financial resilience to shocks, major adopted by many players. They seek to focus on their own
life events or low levels of capability. A focus on protecting areas of competitive advantage and otherwise look to leverage
vulnerable customers is at the heart of the FCA’s stated the skills and expertise of third parties.
mission and its updated approach to consumers. Data privacy, cyber and operational resilience
Retail protection expanding to business ►► Need, more broadly and in the light of high profile problems
►► Problems that have caused harm to consumers to be put right in 2018, for end-to-end resilience to operational disruption,
proactively, efficiently and fairly, including the payment of cyber risks and to protect customer and personal data.
compensation and remediation of processes. Together, these regulatory and public policy focus areas are
►► The continuing fight against financial crime and fraud. driving an unprecedented range of initiatives — summarised in
fig. 1 and then discussed in turn — that impact the whole spectrum
►► Appropriate treatment of small and medium sized business
of retail and business banking products, distribution, problem
customers, as well as traditional retail customers.
resolution and governance and control activities.
Strong governance and culture
►► Visibly improved governance, with greater accountability and
responsibility being placed on the shoulders of individual senior
managers and boards.
Regulatory themes for UK retail banking in 2019 2
Fig 1: The regulatory outlook for UK Retail Banks in 2019
Impact Themes Impact
Savings, payments, Underlying regulatory Governance and control
current accounts themes ►► RFB compliance and
►► Impact of competition and ►► UK focussed, new ringfenced independence
switching banks ►► SMCR evolution
►► Treatment of inactive savers ►► Choice, competition, value and ►► Data privacy, cyber, operational
fair pricing resilience
►► Fairness of FIIC and business
current account propositions ►► Vulnerability ►► Culture, whistleblowing
►► Alternative Remedies Package ►► Demographics, employment ►► Opportunities of utilities,
patterns management of ecosystems
►► Financial crime and fraud
►► Retail protections expanding to ►► Controls operating models,
business innovation, automation and
►► Strong governance and culture analytics
Lending
►► Ethical use of data
►► Economic impacts and support
►► Product design, affordability Ethics, culture, purpose
►► Arrears and collections
Problem resolution
►► Vulnerable customers ►► Closedown PPI
Innovation, data and
►► Climate change
technology ►► New dispute routes for business
customers
Secured: ►► Data access, Open Banking
►► Ageing population, irregular ►► Address remaining historic issues
►► Automation, analytics, product
income tailoring
►► LIBOR transition ►► Ecosystems of provision,
►► Mortgage prisoners third-party management Distribution
►► Inactive SVR customers ►► Data privacy, cyber, operational ►► Effectiveness of mobile/new
resilience distribution channels
Unsecured: ►► Incentives for third parties,
►► Persistent card debt e.g., motor
►► Overdraft models ►► Oversight of third parties
►► High cost credit lessons ►► Branch reduction service
alternatives
►► Ethical use of data
►► Digital advice and algorithms —
unintended biases, access
►► Digital ID opportunity
The specific 2019 priority policy and supervisory initiatives in each of these areas are discussed in more detail on the following pages.
3 Regulatory themes for UK retail banking in 2019
Savings, payments and current An emerging topic of regulatory priority, driven by the FSB and
the UK regulators, is the need for the industry to building stronger
accounts processes to consider impacts of climate change and sustainability
in business lending decisioning and risk modelling.
Regulators have recognised that, whilst the number of new
entrants to the market has increased, and this has been New initiatives and priorities look to address concerns about
encouraged by the revised Payment Services Directive (PSD2) customer treatment in both secured and unsecured lending.
and Open Banking, the impact on competition to date — with the
notable exception of payments — has generally been limited. Secured lending:
Without a major technology player disrupting the market, a volume ►► Product flexibility to accommodate the ageing population, e.g.
of small new entrants is unlikely to move the dial materially. through interest-only mortgages into retirement and products
This is driving renewed focus on switching to improve market for those with irregular income patterns; whilst providing the
competitiveness: right level of care in advice.
►► Desire to provide encouragement for inactive savers, who may ►► Support for appropriately designed and sold equity release and
not transition from unattractive rates, to be provided with a similar products to allow for capital rich/cash poor consumers
“basic savings rate” or some further regulatory intervention. to adjust their lifestyles and better manage intergenerational
housing wealth transfer.
►► The Alternative Remedies Package put together to address the
SME banking competition issues involved in the government ►► Support for mortgage “prisoners” who are ineligible for a
rescue of RBS will create new opportunities through its new mortgage despite having solid credit records on existing
capability and innovation fund and incentivised switching products.
scheme. ►► Further support for inactive consumers who may be suffering
►► Risk of funding volatility as deposits become less sticky if harm by staying on relatively high standard variable rates
switching does increase. (SVR) when better deals would be available.
The long running debate will continue about the opacity and ►► Review of the appropriateness of current business models
incentives of free-if-in-credit banking and the fairness of SME involving pricing differentials for the same credit risk in
business current accounts propositions and charges. motor finance.
We expect continued regulatory focus on financial crime and Unsecured lending:
fraud, including authorised push payment fraud.
►► Use of data analytics and algorithms to develop new
products and better target offerings to customers,
Lending whilst being conscious of the risks of introducing new
inappropriate decision biases and explicitly addressing ethical
Economic concerns are placing great emphasis on the need for
questions arising.
banks to continue to support the UK economy in a potential
downturn, whilst properly assessing customer affordability and ►► Increased support for customers with persistent credit
maintaining capital strength. card debt.
Customer treatment concerns will mean a continued supervisory ►► Re-engineering overdraft models and fees to a single rate
focus on affordability, product design and designing and delivering (including for “unarranged” overdrafts) and developing a
fair arrears and collections practices. This includes questioning the strategy to avoid repeated use.
appropriateness of fees and charges, and a stronger prominence ►► Learning lessons from the demise of many high-cost credit
on support for vulnerable customers. providers and finding opportunities either to replace them or
A specific challenge which will need to be progressed substantively to work with alternative credit providers for less mainstream
in 2019 is communicating and managing the transition from LIBOR consumers.
to new reference rate bases, as LIBOR is phased out. This is likely
to be embedded in the pricing of a number of retail products such
as historic mortgages.
Regulatory themes for UK retail banking in 2019 4Distribution Problem resolution
Distribution models are evolving rapidly as more customers The industry continues to address a long list of rectifications of
demand mobile and digital services, traditional distribution historic issues. Progressing both substantive delivery of existing
methods decline in importance and banks access the market programmes and building stronger, more reliable and efficient
through a wider ecosystem. Regulators want to support innovation processes are priorities for 2019. Key topics include:
but also ensure that new business models, processes and
►► Closing down PPI complaints programmes in a demonstrably
incentives support good customer practice and do not create
robust manner.
barriers for the most vulnerable. Focus areas for 2019 include:
►► Adopting new arbitration and dispute resolution routes,
►► Appropriateness of commissions and incentives models and
including the Financial Ombudsman Service (FOS) for business
the related potential for conflicts of interest, including for
and SME customers; and responding to a new regulatory
third-party brokers, such as motor dealers.
environment for claims management companies.
►► Overseeing the quality of third-party activities, including point
►► Addressing historical problems with consumer credit
of sale affordability checks, servicing and collections agents.
disclosures and unfair treatment caused by inappropriate or
►► Ensuring proper use of customer data for cross-selling and incorrectly applied rates, fees and charges.
other purposes beyond that for which it was originally gathered
►► Continuing to improve the robustness of data gathering and
and wherever it is stored.
decisioning automation; optimising processes to allow issues to
►► Ensure that the continuously increasing digital advice services be addressed more rapidly and more efficiently.
deliver benefit to customers, provide the right information in a
timely way to customers in the different intended formats and
don’t embed inappropriate bias.
►► Seizing opportunities from paperless, straight through
processing and opportunities for more streamlined KYC
processes such as a “digital ID”.
►► Maintaining service options for non-digital customers as
branch footprints continue to reduce.
5 Regulatory themes for UK retail banking in 2019Governance and control ►► Controls and risk management: reinvention of frameworks
and operating models to ensure clarity of scope of
Boards and senior management teams face a demanding responsibilities, build and leverage stronger data skills, reflect
governance agenda in 2019. The introduction of the Senior increased first line ownership of risk and related strengthening
Managers and Certification Regime for banks in 2016 stressed of business control functions, and de-duplicate control effort
individual accountability. Practices will continue to evolve as new between first and second lines.
legal entity structures bed down and regulatory enforcement
►► Data ethics: ethical considerations of data-driven propositions
cases start to emerge. There will be continued focus on embedding
to be robustly built into product design and governance,
strong cultures which reflect corporate purpose and values.
even as agile development cycles create a need for increased
Important priorities for 2019 include: nimbleness and speed in control challenge.
►► Ringfencing: demonstrable maintenance of compliance
with the ringfencing requirements, including independent
governance, lack of dependence on arm’s length commercial
arrangements with other parts of the group.
►► Resolvability: developing resolvability assessments ahead of
their publication.
►► Operational resilience: an end-to-end business lens on
managing and controlling data privacy, cyber, disaster
recovery and crisis management, operational continuity in
resolution and third-party risk management in a robust and
coherent manner.
►► Conduct and culture: continued build out of conduct
frameworks and reporting, with focus on whistleblowing,
diversity and culture assessment. In product development
and pricing, banks may need to proactively reassess how they
deliver fair value for customers.
►► Vulnerability and customer treatment: proactive recognition
that many customers are likely to be vulnerable at some stage
in their relationship with the bank, and building skills, product
and service flexibility, governance and MI to deal with this
appropriately.
►► Innovation: further exploration and implementation of
robotics, analytics, machine learning and artificial intelligence
to improve controls, better ways to identify and manage risks,
and reduce costs. Priority areas currently include financial
crime and fraud, regulatory reporting, credit decisioning and
conduct. This is likely to involve partnerships with third parties,
utilities and potentially competitors in areas of common
interest.
Regulatory themes for UK retail banking in 2019 6How we can help EY UK retail banking contacts
Dan Cooper
UK retail banks face a regulatory agenda UK Banking & Capital Markets Leader
that is daunting in its scope and intensity, but dcooper@uk.ey.com
+ 44 7880 787 884
also seeks to encourage competition, fuelled
by increased innovation and real focus on Penney Frohling
customer fairness, value and transparency; and UK Banking Strategy Leader
underpinned by robust and strong governance pfrohling@uk.ey.com
+ 44 7552 271 078
and risk management. These priorities are at
the heart of the purpose and values of most Jenny Clayton
UK retail banks. At a time of transformational UK Retail Banking Regulatory Leader
change and disruption, those that treat this jclayton2@uk.ey.com
+ 44 7831 383 178
regulatory agenda not as an add-on but a core
part of their strategic and operational effort to John Liver
reinvent their customer offerings and business Co-Chair, EY Global Regulatory Network
jliver1@uk.ey.com
stand to improve customer trust and strengthen
+ 44 7717 736 246
their market position.
Sajedah Karim
EY professionals are working with leading
UK Consumer Credit and RegTech Leader
banks to help them navigate this complex skarim1@uk.ey.com
landscape and develop coherent strategy that + 44 7900 496 026
accommodates all the disparate demands. We
Heather Alleyne
bring a breadth of skills in business strategy,
UK Retail Banking and Mortgages Leader
proposition development, organisational and halleyne@uk.ey.com
skills development, operating model design and + 44 7770 322 464
implementation, automation, data analytics
Richard Brown
and artificial intelligence, cloud and regulation. UK Financial Services Risk Leader
We are helping clients to work through the rbrown2@uk.ey.com
impact of these priorities and initiatives for + 44 7917 171 913
their business; redesign business models
James Lown
and processes to seize the opportunities and UK Retail Banking Conduct Leader
manage the risks of this disruptive environment; jlown@uk.ey.com
and implement transformational change. + 44 7879 667 137
Anita Kimber
UK Banking Digital Leader
anita.kimber@uk.ey.com
+ 44 7775 004 847
Debraj Dutta
UK Data and Analytics Leader
debraj.dutta@uk.ey.com
+ 44 7789 924 584
7 Regulatory themes for UK retail banking in 2019Regulatory themes for UK retail banking in 2019 8
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