Financial Regulation: 10 years from the crash, how are things different?

This March marks 10 years since the fire sale of Bear Stearns in 2008, a significant moment in the global financial crisis. This moment offers us an appropriate time to reflect and assess how the banking industry has changed in that time and learned from the mistakes of the past – and to consider what the future holds for the sector.
 
Since the financial crisis, it has been widely noted that the banking industry has been subject to significant regulatory change. There have certainly been a plethora of policy measures and market developments in the post-crisis world. However, it could be argued that the pace of that change has been remarkably slow. For example, two of the most significant regulations have only recently been implemented - Basel III and IFRS9 (addressing concerns with prudential standards and financial reporting), nearly 10 years after the financial crisis took place. Other major regulations, such as PSD2, were only implemented at the beginning of this year.
 
So, when assessing how things have really changed in the past 10 years, it is worth viewing the effectiveness of regulatory and market reforms in terms of how they have addressed their underlying purpose -- i.e. to reduce systemic risk in the banking system and provide better outcomes for the consumer. 
 
In this respect, it is not certain as yet that these reforms have succeeded. In the past decade, we have seen a range of challenger banks emerge, but it would be fair to say that they have not made enough of an impact on the market share of the ‘Big 4’ banks to alter their systemic risk profile. Moreover, ‘tier 1’ established players maintain their competitive advantage through their scale, access to cheap funding and a relatively easy ride from regulators. In the absence of a level playing field, new entrants and challengers have had to take risks and lower their margins in order to compete effectively and grab market share. 
 
There have, of course, been important regulatory changes to the market. From a market competition perspective, arguably the most important piece of regulatory change has been the implementation of the Payment Services Directive. This has enabled financial services providers to offer credit products without the need to provide a current account. This has been a very important way of opening up the market to range of new lending products. Given the very low switching rates among personal current accounts, bypassing the need to offer one has been an effective way of lowering the barriers to entry for new retail financial services providers.
 
Nevertheless, challenger banks need to be smart and adaptable when taking on established players. They should consider forms of collaboration in offering products and services, data sharing and even in marketing and communications. Through working together, smaller providers can better match the scale and marketing budgets of their larger competitors. In this respect, the recent introduction of open banking, enabled by the Second Payment Services Directive (PSD2) offers significant potential to threaten the dominance of established players. By forcing the major banks allow third parties (including challenger banks) to access the data of customers, it greatly levels the playing field between larger and smaller banks and allows challengers to offer consumers more appropriate and competitive products. 
 
Given the significance of open banking and the potential benefits that PSD2 can bring to challenger banks, there is a legitimate question as to why the industry isn’t doing more to promote it. For all its potential, open banking currently has a low level of consumer awareness (92% of the public have not heard of it) and it requires consumers to actively ‘opt in’ in allowing their data to be shared. There could, therefore, be significant opportunities for challenger banks to drive changes in consumer behaviour through a jointly funded and coordinated public awareness campaign or lobbying effort. 
 
It could be argued, therefore, that the major changes in banking are yet to come. Indeed, the pace of change, which to date has been relatively slow, could start to pick up significantly. These recently implemented policy and regulatory changes, combined with rapid technological innovations, have the potential to radically change the retail financial services market over the coming years. This could fundamentally alter the dynamic between established players and challenger banks and the relationships between banks and their customers. 
 
If properly delivered, these changes could leave us with a more competitive industry which provides better outcomes for the consumer. It will require industry innovators, including challenger banks, to seize this opportunity.