On 18 December 2013 the Financial Services (Banking Reform) Act 2013 (the Act) received Royal Assent. The Act is the latest in a series of legislative measures passed to reform the banking system in the United Kingdom in response to the global financial crisis.

The Act gives new powers to the Prudential Regulation Authority (PRA), the Financial Conduct Authority (FCA) and the Bank of England and introduces measures which address issues currently topical in the media such as the cost of payday loans and the ‘ring-fencing’ of retail deposits held by high street banks.  It also implements a number of recommendations of the Parliamentary Commission on Banking Standards that were outlined in its report – See previous blog post: Changing banking for good.

Set out below is a brief outline of some of the major reforms introduced by the Act and their consequences.


  • All retail deposits held by banks on behalf of both individuals and small to medium size enterprises will be ‘ring-fenced’ or separated from wholesale and investment deposits
  • Retail banking services are deemed vital to the economy and it is believed that ring-fencing will allow banks to continue to provide such services should another crisis occur
  • The specific rules in relation to how ring-fencing will work are yet to be drawn up by the PRA and banks will be expected to comply with the requirements by 2019.

Cap on payday loans

  • The Act imposes a duty on the FCA to impose a cap on the costs of payday loans
  • The cap will apply to interest rates as well as arrangement and penalty fees
  • The FCA must consult with HM Treasury before publishing and draft rules, which will ultimately take effect no later than 2 January 2015.

Senior persons regime

  • All banks must appoint a ‘senior person’ who will be responsible for certain key functions of the bank
  • In order to avoid responsibility for contraventions of banking regulations, senior persons will have to demonstrate they took all reasonable steps to prevent such a contravention occurring or continuing.

Reckless misconduct

  • This measure works alongside the senior persons regime and introduces a new criminal offence whereby senior persons can be accused of reckless misconduct in the management of a bank
  • The maximum sentence for an individual found guilty of the offence is seven years imprisonment and an unlimited fine.

Payment Systems Regulator (PSR)

  • The Act provides for the establishment of a new regulator to oversee the systems banks use for payments made in the course of business
  • The role of the PSR is to promote competition in the payment system market and improve efficiency, innovation and quality of the systems for the end user. 

Bail-in option

  • Following the Banking Act 2009, the Act establishes a ‘bail-in’ option available to the Bank of England to recapitalise banks that have reached the point of failure
  • The process allows losses to be imposed on certain of the bank’s creditors either by writing down their claims or converting them to equity
  • The aim of the measures are to allow for a bank’s losses to be absorbed to facilitate recapitalisation or, in a liquidation, wind the bank up.

The Act sets out the framework under which many of the reforms will operate and we shall wait and see how these changes affect the sector as and when the associated rules and regulations are published.

Link to full text of the Financial Services (Banking Reform) Act 2013:

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This blog is intended only as a synopsis of certain recent developments. If any matter referred to in this blog is sought to be relied upon, further advice should be obtained.