1 Introduction
Background
1. Public confidence in bankers and banking has been
shaken to its roots. Certain conduct in wholesale markets, for
example in relation to the London Interbank Offered Rate (LIBOR),
has exposed a culture of culpable greed far removed from the interests
of bank customers, at least among some market participants. The
systematic mis-selling of a range of retail products, over a number
of years, on a scale which is only now becoming apparent, has
reinforced the impression of a culture across the banking sector
which viewed the customer as a short-term source of revenue rather
than a long-term client. The bank failures and weaknesses in 2007
and 2008 required a massive injection of taxpayers' money, yet
the bankers and bank creditors who had benefited the most in the
years leading up to that crisis were seen to have suffered little,
if at all, from the consequences.
2. When the Financial Services Authority (FSA) set
out the full-scale of wrong-doing within Barclays in respect of
LIBOR, there was a widespread public sense that the cumulative
banking scandals had reached a point at which a specific inquiry
was warranted. The two Houses of Parliament then established this
Commission to consider and report on professional standards and
culture in the UK banking industry.
3. We have considered, and will continue to consider,
many aspects of the crisis in banking standards and culture and
the steps to tackle the crisis which are either underway or still
required. Our aim
is to help answer the question of how the banking system can properly
serve the wider economy. We have identified
five main themes for possible reform:
- How banks are structured:
the possible options to change the structure of banks to strengthen
banking standards and change culture, as well as to meet the objectives
of structural reform;
- How banks compete:
the steps that might be taken to create a more competitive banking
market and have one that responds better to its customers and
to the well-being of society, which will be featured more fully
in our final Report;
- How banks run themselves:
the steps that banks themselves might take to change the ways
bankers are trained, incentivised, led and managed in ways that
change the culture for the better and raise standards;
- How banks are supervised and regulated: the
steps to be taken by the supervisors and regulators (and by those
to whom they are accountable) to ensure that the actions they
take promote and incentivise the right approach and culture in
banks;
- How the law, including criminal and civil
sanctions, applies to banks and bankers:
the ways in which changes in the law or its enforcement could
re-balance the incentives on bankers and change the culture and
standards of banking for the better.
4. Structural changes to UK banks may serve as part
of the way forward in relation to banking standards and culture.
With that in mind, the Government asked this Commission to conduct
pre-legislative scrutiny of the draft Financial Services (Banking
Reform) Bill. When the motion establishing the Commission was
moved in the House of Commons on 16 July 2012 by the then Leader
of the House of Commons, the Rt. Hon. Sir George Young MP, he
clarified that pre-legislative scrutiny of the draft Bill would
be included within our work.[1]
Our pre-legislative
scrutiny work has led to an initial focus on banking structure
and related issues. It is these issues which are dealt with in
this first report from the Commission. The broader questions of
standards, culture and corporate governance will be dealt with
in greater detail in our final Report to be published in the New
Year.
The Government's proposals
OVERALL APPROACH
5. The Government's proposals, which are the focus
of this Report, are contained in a draft Bill and an accompanying
policy paper published in early October 2012.[2]
The draft Bill and policy paper principally give effect to most
of the recommendations of the Independent Commission on Banking
(the ICB). The ICB was established by the Government in June 2010
to consider reforms to the UK banking sector. The ICB published
a Final Report in September 2011.[3]
The main recommendations of the ICB are summarised below:
- Structure: Banking
activities, where continuous provision of service is vital to
the economy and to a bank's customers, should be ring-fenced from
other activities, making it easier to resolve banks that get into
difficulty, without the provision of taxpayer-funded support.[4]
- Capital and loss absorbency:
- Ring-fenced banks should maintain
higher ratios of capital to assets than required by existing international
standards;
- The UK authorities should be able to impose losses
on unsecured debt (bail-in bonds) when a bank gets into difficulty
and on all other unsecured liabilities if a bank in difficulty
needs to enter a resolution procedure;
- Further loss absorbing capacity, in the form
of capital and bail-in bonds, should be required of UK-based banks
deemed to be global, systemically important banks;
- In insolvency, all insured depositors should
rank ahead of unsecured creditors and creditors secured only with
a floating charge.[5]
- Competition and transparency:
- The Prudential Regulatory Authority
(PRA) and the Office of Fair Trading (OFT) should review the levels
of capital and liquidity required from applicants for a deposit
taking licence to ensure they do not unnecessarily limit new entrants
to the banking market;
- A current account redirection service should
be established by September 2013 to smooth the process of switching
current accounts for individuals and small businesses;
- The draft operational objective of the Financial
Conduct Authority (FCA) covering efficiency and choice should
be replaced with an objective to "promote effective competition"
in markets for financial services;
- The OFT and the FCA, should work with the banks
to improve transparency across all retail banking products.[6]
6. The Government published a white paper in June
2012, setting out how it intended to implement the ICB recommendations.[7]
Following consultation, the Government published an overview in
October 2012 of responses, as well as the draft Bill.[8]
Other measures recommended by the ICB on capital, competition
and transparency are being taken forward largely by other means.
Several elements of the ICB's recommendations designed to strengthen
the ability of banks to absorb losses are being dealt with at
a European level.[9]
THE FIVE EXCEPTIONS
7. The draft Bill and the associated policy measures
are intended broadly to give effect to ICB recommendations on
structure, capital and loss absorbency, with five exceptions,
identified by Sir John Vickers and confirmed by the Chancellor
of the Exchequer,[10]
and considered in the course of this Report, as follows:
- Smaller banks are proposed
to be exempt from the ring-fencing requirement;
- The leverage ratio for ring-fenced banks is not
proposed to be increased in line with additional capital requirements;
- Ring-fenced banks are proposed to be allowed
to sell derivatives as principal, subject to certain conditions;
- The overseas operations of large banks might
be able to be exempted from requirements to hold additional capital;
and
- Ring-fenced banks are proposed to be allowed
to own non-EEA assets in certain circumstances.
THE NEXT STEPS
8. The draft Bill constitutes only part of the Bill
due to be introduced to Parliament early in 2013.[11]
The provisions on payments systems and the reform of the Payments
Council in response to recommendations of the Treasury Committee
have not been published for pre-legislative scrutiny.[12]
Similarly, changes to the governance structure of the Financial
Services Compensation Scheme will be made by the Bill, but have
not been published in draft.[13]
9. The new Bill will be the most appropriate vehicle
for giving effect to the wider recommendations of this Commission
in our final Report in the New Year. The Financial Secretary to
the Treasury has given an assurance that the Government will consider
broadening the scope of the banking Bill in the New Year to give
effect to the recommendations of the Commission in our final Report.[14]
Other reforms to the regulation of financial services and the
identification of systemic risks have been brought forward in
the Financial Services Bill, which has just completed its Parliamentary
stages.[15] We consider
how these various legislative initiatives interact later in this
Report.[16]
Scope of this Report and conduct
of our work
10. In this Report we consider the proposals flowing
from the ICB's recommendations relating to structure, capital
and loss absorbency, including those which do not give rise to
measures in the draft Bill. We also make one recommendation in
relation to a separate provision of the draft Bill on fees. We
will return to those aspects of the ICB Report which relate to
competition and transparency in our final Report in the New Year.
11. It is customary for ad hoc joint committees appointed
to consider draft Bills to be given at least twelve sitting weeks
to complete their work. The Commission was required to report
on this complex legislation in less than ten sitting weeks after
the publication of the draft Bill. The Commission was also being
asked to undertake this task in addition to our principal responsibility
of reporting on banking standards and culture, and we have had
to combine our work on the draft Bill with taking evidence in
pursuit of our principal responsibility.
12. The timetable
for scrutinising the draft Bill which was arbitrarily dictated
by the Government has meant that we have been unable to do justice
to all of the issues which arise out of the draft Bill and related
policy measures. We are concerned that the Government has constrained
the ability of Parliament to conduct full scrutiny of a Bill of
such vital importance.
13. The Commission held twelve evidence sessions
focused in whole or in part on structural issues, taking evidence
from a range of witnesses, including Paul Volcker, former Chairman
of the US Federal Reserve, Erkki Liikanen, Chair of the High-level
Expert Group on structural bank reforms established by the European
Commission, Sir John Vickers and Martin Taylor (both former members
of the ICB), Lord Turner of Ecchinswell, Chairman of the FSA,
Sir Mervyn King, Governor of the Bank of England, and the Rt.
Hon. George Osborne MP, Chancellor of the Exchequer. The Commission
also received written evidence of considerable value. The Commission
is most grateful to all those who submitted evidence, as well
as to the Specialist Advisers for this work, Bill Allen, John
Willman and Professor Geoffrey Wood.[17]
1 HC Deb, 16 July 2012, col 797 [Commons Chamber] Back
2
HM Treasury, Sound banking: delivering reform, Cm 8453,
October 2012 Back
3
Independent Commission on Banking, Final Report, September 2011 Back
4
Ibid., para 9.2 Back
5
Ibid., para 9.3 Back
6
Independent Commission on Banking, Final Report, September 2011,
para 9.4 Back
7
HM Treasury, Banking reform: delivering stability and
supporting a sustainable economy, Cm 8356, June 2012 Back
8
HM Treasury, Sound banking: delivering reform, Cm 8453,
October 2012, para 1.4 Back
9
Ibid., para 2.3 Back
10
Qq 786-8 [Sir John Vickers]; Qq 1061, 1074, 1075, 1094, 1100 Back
11
HM Treasury, Sound banking: delivering reform, Cm 8453,
October 2012, para 1.5 Back
12
Treasury Committee, The future of cheques, Eighteenth Report
of Session 2010-12, HC 1147, paras 46-47 Back
13
HM Treasury, Sound banking: delivering reform, Cm 8453,
October 2012, paras 2.63-2.67 Back
14
HC Deb 10 Dec 2012 : Column 74 [Commons Chamber] Back
15
HM Treasury, Sound banking: delivering reform, Cm 8453,
October 2012, para 1.2 Back
16
Chapter 8 Back
17
Bill Allen and Professor Geoffrey Wood declared interests, relevant
to the Commission's work, on 29 August 2012. John Willman declared
his interests, relevant to the Commission's work, on 12 September.
All three declarations of interest are available at http://www.parliament.uk/business/committees/committees-a-z/joint-select/professional-standards-in-the-banking-industry/formal-minutes/
The Commission has also appointed other Specialist Advisers in
relation to other aspects of its work. Back
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