Banking StandardsWritten evidence from the Rt Hon George Osborne MP, Chancellor of the Exchequer

I am pleased to be publishing the draft Financial Services (Banking Reform) Bill today, and to send the draft Bill to the Parliamentary Commission on Banking Standards for pre-legislative scrutiny. As you know, this is the next important stage in a process of reform to address the failings exposed by the financial crisis in 2007–09, and to implement the recommendations of the Independent Commission on Banking.

I look forward to hearing the views of the Parliamentary Commission on Banking Standards on the draft Bill. As agreed, in order to give the Commission sufficient time to consider the draft Bill and deliver its report by 18 December, I am publishing the draft Bill, and sending it to the Commission for scrutiny, this week, while Parliament is in Recess.

One specific area where I would particularly appreciate the Commission’s input is the question of whether ring-fenced banks should be permitted to sell simple risk-management products, including simple derivatives, to their customers. This is not a question that needs to be resolved for the draft Bill itself, but will need to be settled as we develop the secondary legislation under the draft Bill.

As you know, the ICB said that ring-fenced banks could be allowed to offer risk-management products to their customers, provided that they did so in a way that did not expose them to increased market risk, and that the products provided were simple enough that they did not threaten the resolvability of the ring-fenced bank. In the June White Paper, the Government suggested that this could be given effect by allowing ring-fenced banks to sell simple derivative products to their customers, subject to a rigorous framework of safeguards. The White Paper set out what those safeguards might be, including restrictions on the type of product that could be offered, the manner in which risk-management products were provided and the customers to whom they could be sold. The White Paper noted that the Government would continue to explore whether a suitably robust set of safeguards could be developed to ensure that the provision of derivatives by ring-fenced banks did not threaten resolvability.

Recent events have highlighted the conduct risks around the sale of derivatives, including the risk of mis-selling by banks. Regrettably, mis-selling can, of course, occur with any product and under any business structure: hence the need for robust conduct of business regulation, and for the establishment of the Parliamentary Commission on Banking Standards to make recommendations on how the highest standards of behaviour by banks can be maintained. I would welcome the views of the Parliamentary Commission on Banking Standards on this subject, to inform Government thinking as secondary legislation is developed. To allow us to meet our legislative timetable, it is essential that the Commission’s recommendations on derivatives, as well as on other legislative matters, are received by 18 December.

I am pleased to see the Commission taking forward its important work on banking standards and ethics, and I look forward to receiving your report on the draft Bill and your wider recommendations. I am copying this letter to the members of the Commission and placing a copy in the House Library.

12 October 2012

Prepared 2nd January 2013