This year we marked 15 years since the global financial crisis in 2008-09. On September 15, 2008, the collapse of the American investment bank Lehman Brothers led to chaos on Wall Street and soon spread around the world. A week earlier, two large mortgage finance agencies in the U.S., Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation), were taken over by the U.S. Government. 

The US$187.5 billion bailout was one of the largest in U.S. history. The American International Group (AIG), a large insurance firm that sold credit protection to many banks involved in the credit crunch, was also rescued by the U.S. Treasury and Federal Reserve for US$182.3 billion in total. AIG was too big and too interconnected to fail.

In the U.K., HBOS, Britain’s sixth-biggest bank and largest mortgage provider, would merge with Lloyds TSB, itself the fifth-biggest bank in Britain. The U.K. Government had to rescue Lloyds TSB, the Royal Bank of Scotland and to nationalize Northern Rock and Bradford & Bingley Bank, spending billions of taxpayers’ money to rescue financial institutions, restore financial stability, and protect consumers.

The U.K. and the U.S. governments put in place several measures to deal with the turmoil. Regulators intervened to address the immediate crisis, but gaps and blind spots were identified in regulating financial services. The effectiveness of the regulatory framework and of some regulators was questioned. Radical improvements were needed if countries were to avoid a similar crisis happening in the future.

The lessons learned in the aftermath of the crisis led to changes in regulation, including the creation of new regulators and the establishment of new regulation and regulatory initiatives. For example, in the U.K., the Financial Services Authority (FSA) was abolished in 2013 and the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) were created. International cooperation was improved with the creation of the Financial Stability Board (FSB) in 2009 to promote and monitor global financial stability. The FSB led on international reforms and international standards that its members were committed to implementing at a national level.

On the back of the U.K. Parliamentary Commission on Banking Standards report ‘Changing Banking for Good’, published in 2013, a series of regulatory measures were put in place. 

For example, the Senior Managers and Certification Regime (SM&CR) was launched in 2016. In the aftermath of the crisis, it proved difficult to hold the executives of failed banks to account. To prevent this from happening again, the SM&CR requires firms to allocate clear roles and responsibilities to senior individuals like the CEO and Chair, making it easier to establish accountability if things go wrong. 

In addition, to make sure that banks can fail without disrupting banking services to individuals and small businesses, from 2019, large U.K. banks must separate core retail banking services from their riskier investment and international banking activities. This is known as ring-fencing. Remuneration rules have also been progressively strengthened to better align pay with performance and to discourage excessive risk-taking and misconduct.

Have all these regulatory measures been effective? Governments and regulators claim that liquidity and short-term resilience of banks improved with the new rules; firms’ ability to cope with periods of stress and unexpected shocks increased post-crisis; and banks can fail with less impact on financial stability as seen recently with the failures of the Silicon Valley Bank, Signature Bank, and Credit Suisse. Despite that, in December 2022, the U.K. Government launched the Edinburgh Reforms of U.K. financial services with over 30 regulatory reforms.

As a result, the Financial Services and Markets Bill was granted Royal Assent in June 2023. The U.K. Government stated that the “landmark bill was to regain control of the financial services rulebook,” paving the way for reviewing regulatory measures put in place to address the drivers of the global financial crisis. 

The new Act contains new powers – available due to Brexit – that will set the path for reforms to Solvency II which the government claims “will unlock around £100 billion for productive investment and help cultivate innovation and grow the economy”. Solvency II (Directive (2009/138/EC) and associated legislation) introduced a new prudential regime for insurance and reinsurance undertakings in the EU. European (Re) Insurance companies reduced their securitization investments. Securitization was considered one of the drivers of the global financial crisis. The crisis created uncertainty and loss of confidence in this market, reducing investments. The planned reforms hope to address that.

The government is also consulting on near-term reforms to the ring-fencing regime, claiming that these reforms “do not unlearn the lessons of the past and are a sensible evolution of the regime.” 

In addition, as part of the Edinburgh Reforms, the government announced that the Treasury, the PRA, and the FCA would review the SM&CR. A call for evidence and a joint discussion paper by the regulators “to identify the most effective way for the regime to deliver on its core objectives” were closed last summer and we await next steps to be published. Regulators also consulted on and are reviewing remuneration rules in financial services with the aim to remove the “bonus cap” to “strengthen the effectiveness of the remuneration regime.”

If the regulatory measures put in place to deal with the financial crisis were effective, why are some of the key pillars being reviewed or reformed?

As Cary Coglianese discusses, we need to understand regulation as a verb instead of a noun. It evolves and changes more often than we realize. The effectiveness of regulation and regulatory initiatives are also dependent on the overall context of a specific time. New risks emerge and old risks return, so legislators and regulators have to react and deal with new events and circumstances as we have seen with Brexit, the COVID-19 pandemic, wars, geopolitical tensions, and the return of inflation. 

Economic growth and market competitiveness are as important as other outcomes such as consumer protection and financial stability. With a complex set of factors to consider and balance, regulation and regulators have to constantly adapt, transform, and respond to new risks and developments to ensure that they continue to deliver the right outcomes and their mandate effectively.

Rick Borges writes on regulation and related topics in financial services. With his extensive experience spanning the financial services and health care sectors, he acted as an advisor on professional standards and regulation to organizations in the U.K. and internationally.