At present the UK is one of the last major economies apparently still in recession, with France and Germany exiting recession last summer. However, it now appears that there may be light at the end of the tunnel.

On 12 January 2010, the BBC reported on the latest UK economic survey from the British Chambers of Commerce (BCC). The survey covered Q4 2009 and improvements had appeared in many areas, most strikingly in manufacturing. However, it was not all good news in the sense that despite exports in the service sector strengthening, services were still struggling overall. Despite this the BBC reported that the BCC chief economist thought that there was enough in the Q4 results to support the view that the UK was on the brink of leaving recession. This view gained further credibility the following day when the National Institute of Economic and Social Research predicted that the UK economy would be shown to have grown by 0.3% in Q4 2009, effectively bringing an end to the recession. All eyes will be on the UK’s official gross domestic product figures for Q4 2009, which will be released on 26 January 2010.

Whatever the economic conditions for 2010 the regulatory landscape will continue to evolve as a result of the financial crisis.

Starting with banking regulation. In mid-December 2009, a member of the Bank of England's Monetary Policy Committee, David Miles, gave a speech (The future financial landscape) in which he acknowledged that the way in which banks operate would now be different - in the near term because of the damage done to their balance sheets and the continuing fragility of their funding; and in the long term because of the need to ensure that the chances of another banking collapse like the one just seen are much reduced.

But how will this play out? Many commentators, including Miles, note that banks had been previously allowed to hold less capital than they used to and many had aimed to minimise their capital requirements. Banks were also holding less liquid assets than they used to and there was a wide belief that State support would be forthcoming in the event of difficulties. Whilst past events have shown that, to varying degrees, governments will support their banking sector, many of the other factors have already changed or will change in 2010. For instance, there seems to be universal recognition from regulators that banks need to hold more capital and more liquid assets. In 2010 the FSA will provide feedback on its Turner Review Conference Discussion Paper which looked at the trade-offs involved in increasing capital and liquidity requirements. It also discussed the problems of systemically important "too-big-to-fail" banks.

But banking regulation is not the only area changing:

Shortly before the Conference, 59.6% of respondents to a Norton Rose survey identified climate change as needing to be a more significant priority for governments than the global economic crisis.

By far the most widely-discussed outcome of the Conference was the "Copenhagen Accord". Unfortunately, it does not necessarily live up to the expectations of our survey respondents. The Accord endorses for the first time in a global context the objective of limiting global temperature rises to less than 2°C above pre-industrial levels. Developed countries are required to submit economy-wide emission reduction targets. Developing countries are provided with a depository in which to submit emission mitigation actions. Importantly, the Accord provides for fast start (pre-2012) finance for developing countries approaching US$30 billion. Developed countries commit to providing medium-term financing of US$100 billion annually by 2020.

However, the Accord does not refer to a legally binding agreement in respect of global emissions being entered into in the future. Nor does it set out a 2050 global emissions reduction goal.

Finance was a key stumbling block of the negotiations. The mid-term finance agreed falls significantly below what many have been estimated to be required. It seems apparent that the current constraints on national budgets resulting partly from the global financial crisis have not facilitated the ability of developed countries to fund emissions reduction actions and adaptation in developing counties. There have been tensions, including within the EU, in relation to both the total level of finance that could be committed to and how to work out individual country contributions.

Another aspect of the Copenhagen negotiations that failed to make significant headway was the discussions in relation to scaled-up "market mechanisms" (carbon trading). A number of developing countries used the causes and impacts of the financial crisis to reinforce their historic negotiating positions which do not favour the use of market mechanisms to combat climate change. However, the inability to rely on the international carbon markets reduces the willingness of developed countries to commit to being able to achieve stringent emission reduction targets.

The weakness of the Accord, to which these financial crisis-related tensions have partly contributed, has meant that the EU has not yet been able to move its target to reduce its emissions below 1990 levels by 2020 from 20% to 30%. This deeper target would have in turn been passed on to the UK and other Member States. Notwithstanding the financial crisis, the UK has committed to a legally binding target of an 80% cut in emissions by 2050 and a 34% reduction by 2020.

HM Treasury and the FSA have published a joint paper which was entitled Reforming OTC Derivative Markets - A UK perspective. In this paper the Treasury and the FSA (the Authorities) responded to the recent European Commission Communication on ensuring efficient, safe and sound derivatives markets by setting out their thinking on the measures that need to be implemented to address systemic shortcomings in OTC derivative markets.

Key measures include:

The Authorities' approach is broadly supportive of international moves towards clearing solutions and to the extent these are not available other risk mitigation techniques. The underlying message is that Europe and the US should be in step and a lot of detailed work will be needed to decide on the criteria for clearing eligibility and that a "carrot rather than stick" approach is preferable.

The Authorities' approach of seeking to encourage the use of OTC derivative clearing rather than mandating it differs from the approach of the European Commission in its October communication. There is also no enthusiasm for mandating on exchange trading of derivatives with a clear argument that the decision to remain in the OTC environment or to trade on platform should be left to the industry. Again this strikes a different note to the mandatory approach to on platform trading struck by the European Commission communication.

In May, HM Treasury published a discussion paper entitled Developing effective resolution arrangements for investment banks. In this discussion paper HM Treasury set out its initial thinking on the steps necessary to improve the regime around the failure of investment firms.

HM Treasury has followed up the discussion paper by publishing a consultation document which is entitled Establishing resolution arrangements for investment banks. In this consultation document the Government provided further detail on its thinking and outlined more than 30 policy initiatives that are designed to mitigate the impact of the failure of an investment firm.

The lay out of the consultation document is as follows:

Perhaps the consultation document strikes a very different tone to the May paper. It recognises more clearly the depth of concern about the UK architecture around administration and protection of client assets and no longer takes the line that the problems were purely practical. The twin messages that client entitlements must be paid out as quickly as possible and that administrators should not fear making interim payments in case creditors claim against them have been heard clearly. It is in this context that the proposals such as those on special administration office holders and limitations on transfers of client moneys to affiliated companies should be read.

The deadline for comments on the consultation document is 16 March 2010.

In the 2009 Pre-Budget Report, the UK Government announced a new, one-off and temporary, tax on employee bonuses. This corporate payroll tax is additional to any income tax and national insurance liabilities that may be payable.

The new BPT, chargeable at 50%, will be payable by any relevant UK or foreign bank, building society or other financial services firm which pays a bonus (in any form) to employees (exceeding GB£25,000 per employee) at any time in the period between 9 December 2009 and 5 April 2010.

The draft legislation is not designed to catch "regular" salary, meaning pay which cannot vary according to business or individual performance or similar considerations. In addition, there is a specific exclusion for bonuses paid under a contractual obligation which arose before the chargeable period and where the employer no longer has discretion as to the amount payable.

The total BPT will be payable by all relevant companies on 31 August 2010. It is expected also that firms will have to record and report bonus payments made during the period, whether or not they believe BPT is payable on them. HMRC has yet to publish penalties for non-payment, but is considering publishing a list of "deliberate defaulters".

The draft legislation contains anti-avoidance measures. There are provisions preventing, among other things:

Concern was raised by financial services firms which are not within banking groups as to whether they would be subject to the BPT, as the initial definition of "taxable company" was defined by reference to a broad range of regulated activities.

This prompted HMRC to issue clarification, restricting the scope of the BPT to firms that are “full scope BIPRU 730k investment firms” under FSA rules (or would be if their head office was in the UK). Broadly this includes firms that are subject to the highest base capital requirement for regulatory capital purposes, and which are authorised by the FSA to carry on activities of "dealing on own account" and "underwriting and/or placing financial instruments".

This should mean that many firms, such as companies primarily engaged in asset management, are outside the scope of the BPT; however this will not be clear until the revised draft legislation is published.

It seems likely that there will be continued debate and refinement of the BPT, especially since the UK Government is considering extending the chargeable period until the relevant provisions of the Financial Services Bill come into force.