© The Financial Times Ltd 2015 FT and 'Financial Times' are trademarks of The Financial Times Ltd.
February 4, 2013 1:52 pm
Four years after the financial crisis of 2008, George Osborne, chancellor, has announced his Banking Reform Bill.
WHAT ARE THE MAIN POINTS OF THE GOVERNMENT’S BANKING REFORM?
First, in April, the Financial Services Authority will be abolished and replaced with a brand new watchdog with enhanced power.
Secondly, the government is introducing new legislation to separate high street banking from investment banking.
Thirdly, it wants to change the culture and ethics of banking and will appoint a new conduct regulator – the FCA – to ensure the UK has an open and transparent market.
The fourth change will be to ensure customers are given more choice in banking by bringing new banks on to the high street to challenge the established players, as well as making it easier for customers to move banks if they can get a better deal elsewhere.
HOW IS THIS DIFFERENT FROM WHAT HAS ALREADY BEEN SAID?
The Independent Commission on Banking – headed by Sir John Vickers – concluded in 2011 that ‘ring-fencing’ was the best way to protect retail banking activities from future investment banking losses.
As a result, the government said banks had to ring-fence their operations by 2019 to ensure taxpayers will not have to bail them out.
However, complaints last December from the Parliamentary Commission on Banking Standards – set up in the wake of the Libor scandal – that these reforms had not gone far enough, have now forced the government to strengthen the legislation. It will give the new City watchdog the power to “electrify the ring-fence” – a threat to break up banks into investment and retail arms, if banks baulk at, or attempt to cheat on, the separation of high-risk operations from savers’ deposits.
“My message to the banks is clear: if a bank flouts the rules, the regulator and the Treasury will have the power to break it up altogether – full separation, not just a ring fence,” Mr Osborne said.
Proposals on changing the payments system were also unexpected, but so far there are few details on what they will mean and how they will be implemented.
WHAT DO WE KNOW ABOUT CHANGES TO THE PAYMENT SYSTEM?
Mr Osborne has promised a new look at the way payments move around the UK with an idea toward making sure they “serve the needs of consumers, not the needs of the established banks”.
He wants to open up the infrastructure so that it is easier for new banks to plug in and for customers to switch banks.
He also wants to shorten the amount of time it takes for cheques and credit and debit card payments to clear.
There are few details so far. If this results in a brand new IT infrastructure that functions as a public utility, it would have a massive impact on banking for retail and small and medium-sized customers.
But it has already cost banks more than £850m to cut down the time it takes to shift current accounts from 30 days to seven days. Further reductions would likely require far more money.
WHAT WILL THIS MEAN FOR COMPETITIVENESS IN THE CITY?
The British Bankers’ Association argues that the Banking Reform Bill will create uncertainty for investors, making it more difficult for banks to raise capital, which will ultimately mean that banks will have less money to lend to businesses.
The CBI has warned that the threat of full separation would be detrimental to businesses, preventing them from accessing the full range of services they need from a single provider.
Mr Osborne, on the other hand, says that the legislation would give the UK “the best, most open and transparently policed markets in the world . . . that will win business for Britain, attract investment”.
HOW WILL THE BANKS REACT?
Most of what was in Mr Osborne’s speech, and in the legislation now heading to parliament, was communicated to banks in advance. Insiders say that the main surprise was Mr Osborne’s acceptance of the “electrification” of the ring fence and that has provoked opposition.
However, not everything is as it seems: the BBA has publicly stated that the electrification will cause uncertainty in the sector and lower competitiveness. According to Andrew Tyrie, the chairman of the parliamentary commission on banking, the lobbying of the BBA was evidence of why the banks needed tough treatment.
But behind closed doors, bankers are much less worried about the electrification, confiding that it would be suicidal to try to break through the ring fence in the current atmosphere and, even if in a few years people had forgotten their anger with bankers, the regulator would easily be able to detect efforts to cross the line.
The banks have not seen enough detail of what Mr Osborne proposes in his changes to the payments system to give a clear reaction yet.
WHAT OPPOSITION WILL THE CHANCELLOR FACE FROM BANKS AND POLITICIANS?
As stated above, any banking opposition to the measures is likely to be more smoke than fire, although they are nervous about what shape reforms will take to achieve Mr Osborne’s desire to open up the market and change IT systems to speed up clearance of payments.
In parliament, the chancellor solved most of his problems when he agreed to take on the electrification proposal from Mr Tyrie and Lord Lawson, the former Tory chancellor.
Mr Osborne said he hoped the Banking Reform bill would be on the statute book in early 2014. The “deterrent” of possible full separation of banks that break the rules is likely to win cross-party support.
However, Labour and Mr Tyrie’s cross-party banking commission wanted to go even further, with a reserve power for parliament to break up the entire banking sector if the ring fence was not respected.
Additional reporting by George Parker, Patrick Jenkins and Brooke Masters
Copyright The Financial Times Limited 2015. You may share using our article tools.
Please don't cut articles from FT.com and redistribute by email or post to the web.
Sign up for email briefings to stay up to date on topics you are interested in