"Vastly different" banking sector on the way, says expert as Banking Reform Act receives Royal Assent

The Banking Reform Act, which has now received Royal Assent, will implement the retail and investment banking 'ring-fence' proposed in 2011 by the Independent Commission on Banking (ICB). It will also implement the majority of the recommendations of the Parliamentary Commission on Banking Standards (PCBS), including the creation of a new criminal offence of reckless misconduct that leads to bank failure.

"With the enactment of this legislation the UK finance sector finally has sight of the regulatory hurdles which lie ahead of it," said banking reform expert Tony Anderson of Pinsent Masons, the law firm behind Out-Law.com.

"It is clear that it will be a vastly different, more fragmented sector from that which existed prior to September 2008. Banks and building societies will have much work to do in clearing these hurdles," he said.

As recommended by the ICB, the Banking Reform Bill will 'ring-fence' retail banking activities from the riskier investment and trading activities of the wider banking group. Banks will have until 2019 to comply with this requirement. The new ring-fenced banks will need to be legally and operationally distinct entities from non ring-fenced banks, and will not be able to hold or own the capital of other non ring-fenced entities within the group.

The Act grew from an initial 35 pages to over 200 pages in length following the publication of the recommendations of the PCBS, which was set up to review professional standards and banking culture following allegations of misconduct in relation to LIBOR. Along with the creation of the new criminal offence for senior bankers, PCBS recommendations that were adopted into the final Act included the requirement for an independent review of the effectiveness of the ring-fence within four years of it fully coming into force, and the introduction of a new two-tier authorisation process for bank staff.

However, the Government rejected some of the recommendations of the PCBS. Those that have not been taken forward include fundamental reforms to the governance of the Bank of England and the abolition of UK Financial Investments, the arm's length Treasury body that manages its stake in bailed-out banks.

The Banking Reform Act forms a major part of the Government's response to the 2008 financial crisis. It has already reformed the supervisory system by returning regulatory oversight of the banking sector to the Bank of England, along with new powers to identify and address major economic risks as they emerge. A new conduct and competition regulator, the Financial Conduct Authority (FCA), is also taking forward measures to give consumers more choice and incentivise innovation and competition between banks as part of its statutory remit.

Financial Secretary to the Treasury Sajid Javid said that the passing of the Act was a "major milestone" which marked the end of a three-year process to make the UK banking system "stronger and safer".

"From the outset the Government has built a consensus on this issue and this legislation will deliver crucial changes to the structure of banks, ensuring that UK taxpayers are not on the hook for future bank failures," he said. "The Banking Reform Act will also help to deliver much-needed competition in the banking sector and increase the conduct standards amongst bankers."