Banking Standards Joint Committee Contents

1  Introduction


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


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]


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.


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 The Commission has also appointed other Specialist Advisers in relation to other aspects of its work. Back

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Prepared 21 December 2012