John Glen, Economic Secretary to the Treasury and City Minister and Conservative MP for Salisbury
Since 2008, we have built one of the most robust regulatory systems in the world, designed specifically to ensure financial stability and, above all, to protect taxpayers. But it did not happen overnight, and if we want to continue to be the world’s leading financial centre, we must continue to lead by example.
When the US subprime mortgage market collapsed, it sent shockwaves around the world – and the world was not prepared. In the UK, there was a lack of coordination between the Bank of England, the Financial Services Authority and the Treasury. No single body had oversight of the system, which meant the UK, like so many others, failed to foresee the trouble that was about to surface. The UK economy suffered the deepest recession since the Second World War, banks collapsed, and taxpayers paid the price.
To regain the public’s trust in financial services, the entire system had to be rebuilt from the ground up. The FSA was scrapped, and was replaced by new, more focused financial regulators: the Financial Conduct Authority and the Prudential Regulation Authority (PRA). Consumers were placed at the heart of the regulatory system, with a much greater focus on the conduct of banks, firms and the individuals that lead them. And the Bank of England was refocused to counter future risks to financial stability, with responsibility for the PRA and the new Financial Policy Committee. Those reforms have helped create a more resilient and stable financial system which benefits not only the financial services sector itself, but also the wider economy.
When the likes of Northern Rock, RBS and Lloyds Banking Group collapsed, the government lacked the tools to respond, and the banks’ complexity made it difficult to unpick their retail from their investment banking operations. As a result, when banks lost millions on risky investments, taxpayers had to step in and bail them out to ensure that their cash machines kept flowing. To stop that from happening again, we overhauled the system. Firstly, we made the banks safer by requiring them to hold more capital and liquidity than they did before the crisis. That meant they now had to have larger buffers to protect themselves against losses or sudden withdrawals. Secondly, we implemented a new regime to ensure that bank shareholders and creditors – not the taxpayer – bear the losses of a bank’s failures. Finally, we required the largest UK banks to separate (also known as “ringfence”) their retail bank from their investment bank. That change means that if either the ring-fenced or non-ring‑fenced part of the bank fails, it will be easier to manage the failure in an orderly way without the need for a government bail-out – and without leaving taxpayers on the hook.
Nevertheless, out of pocket and worried for their future, taxpayers quite rightly wanted to know who was accountable for the crisis in the first place. It was not enough to change the regulators of the industry; we had to radically reform the culture of the industry from the bottom all the way to the top. Devised after the crisis and brought into force for the banking sector in 2016, the Senior Managers and Certification Regime (SMCR) is remoulding the culture of financial services for the better. The Regime holds those at the top personally responsible for wrongdoing and reinforces the behaviour and values that the public expect. Legislation was also introduced alongside the SMCR which ensures that bosses whose reckless misconduct causes their institution to fail face up to seven years in prison.
Of course, more remains to be done. A major focus for me since joining the Treasury this January has been on building a fairer and more balanced banking system. The data we have gathered through our Women in Finance Charter, for example, tells us that although good progress has been made to improve gender balance in financial services, there is a lot more that we can do to ensure our banking sector remains the greatest in the world.