Sidebar: Major Regulations Affecting The Financial Services Industry

Basel II provides a regulatory capital framework that is more sensitive to the risks that banks face. It is designed better to align regulatory capital levels with a bank's risk profile. This offers the potential for firms to be able to release for other purposes any capital in excess of regulatory capital requirements. It is likely to affect the product development and investment mix of banks and provide significant incentives for firms to improve their risk management practices. So far, the European Banking industry is estimated to have invested £9 billion ($18 billion/ ¬13 billion) in its implementation.10

Solvency II broadly follows the approach of Basel II. Larger insurers in particular are already tending to align themselves to Basel II standards for their operational risk.11 Solvency II will aim to promote sound risk management, align supervisory requirements with market practices and reward financial services institutions that are good at managing risk. For the first time, insurers will be required to hold capital against their operational and market risks. This is intended to ensure that they can withstand adverse, unexpected events and can protect their policyholders and the financial system as a whole. Analysts have suggested that up to 40 per cent of insurers' buffer capital requirements could be shaved off when the regulation comes into force.

MiFID has introduced significant changes to the European regulatory framework for investment banks and aims to complete the process of creating a single EU market for investment services. The FSA's cost-benefit analysis indicates that MiFID should lead to a one-off investment of £925 million £1 billion ($1850 million $2 billion), with subsequent ongoing costs of £100 million ($200 million).12 However, it also estimated that it will reduce compliance and transaction costs for cross-border firms by £200 million ($400 million).13