UK banking overhaul: Just how radical will the banking commission be?
The long-awaited parliamentary commission on banking standards final report is set for publication in mid to late June.
The parliamentary commission on banking standards is set to publish its final report in mid to late June sparking a major overhaul of the sector.
The commission was set up by chancellor George Osborne in the wake of the Libor rigging scandal last July and is chaired by Conservative MP and Treasury select committee chair Andrew Tyrie.
The final report is expected to touch on every aspect of banking whether it is corporate governance, whistleblowing or capital requirements.
Since January, the commission has focused on a number of areas including corporate governance, below board level governance, retail misselling, competition and international accountancy laws.
In an interim report in December, the recommendation to “electrify” the ring-fence separating retail and investment banking was partially adopted by the Government, while Osborne has explicitly pledged to amend the banking reform bill to include the final report.
Cicero Group director and chief corporate counsel Iain Anderson says: “This is set to be a significant report with multiple recommendations. The key question will be timescales for implementation.”
Will bank sales staff face more qualifications?
The commission has focused heavily on retail misselling since January and examined the payment protection insurance scandal in detail.
Commission member Mark Garnier says there will be a bigger focus on the retail banking sector and bank sales staff in the paper.
He says: “There will be lots on bank sales staff and incentive structures. There has been an awful lot of focus on the investment side of banks but what the average punter comes across on a daily basis is the high street branch. It will be very interesting.”
Former FSA head of ethics David Jackman, who submitted evidence to the commission, says the report could lead to major changes in qualifications and training for bank staff.
He says: “There has been a long-held need for the professionalisation of even the very basic jobs in banking and people find it very odd that there are no qualifications. I expect and hope there will be extra competence that goes wider than it currently does.
“There is room for qualifications but it needs to be more than one-off exams and focus on ongoing training for both competence and ethics.”
Jackman wants all bank sales staff to undertake an independently set qualification covering risk, compliance and consumer protection such as for regulated bank advisers and insurance staff.
He also wants to see compulsory CPD introduced for governance at director level and higher, including non-executive directors.
Lansons Communications director Richard Hobbs says: “Recommendations on training, competence and remuneration of bank staff have a much greater chance of being implemented. Structural recommendations like splitting RBS are harder to do.”
FortyTwo Wealth Management partner Alan Dick says qualifications and training can help drive up standards but the priority should be incentive structures.
He says: “The big problem is the short-termism in incentive packages and until staff incentives are aligned to the long-term interest of consumers it won’t make much difference.
“However, the management of major banks are completely out of touch with reality on financial advice so anything to get them to understand the coalface themselves would be helpful.”
Will the leverage ratio go up?
There has been a fierce debate over the bank capital leverage ratios ever since the publication of the Independent Commission on Banking report in November 2011.
The ICB recommended a 4.06 per cent ratio but the Government opted to fall in line with Basel III requirements with a 3 per cent ratio.
The leverage ratio is the ultimate backstop meaning lenders must hold a certain level of capital regardless of risk. Nationwide and HSBC have warned that any increases to the leverage ratio would seriously hit their mortgage lending as they have low-risk backbooks.
The Building Societies Association says an increase would have a disproportionate effect on mutuals and could hit lending.
BSA head of external affairs Hilary Mcvitty says: “There are only a certain number of levers to pull if you need to raise capital quickly and pulling your horns in on mortgage lending is one way.
“Labour has highlighted the Government’s decision to opt for 3 per cent as an example of watering down the ICB proposals.
“The banking commission will make a judgement in its report and it could give the Government a headache if it opts for the higher 4.06 per cent level.”
Institute of Economic Affairs director Philip Booth says: “When you have a good mechanism for banks failing safely then it should not really be the business of regulators how much capital banks hold.
“Leverage ratios particularly worry me because the more complex regulation becomes the more it gets gamed. I think leverage ratios will be gamed because it is so easy for banks to achieve the effective leverage without actually having leverage.”
What will happen to RBS and Lloyds Banking Group?
The banking commission is expected to make recommendations on both the immediate future of both state-owned banks and their re-privatisation plans.
There is a debate on what should happen to RBS and Lloyds right now and how and when they should be returned to the private sector.
Leaks of the draft report suggest the PCBS will recommend splitting RBS into a “good” and “bad” bank.
The Centre for Policy Studies is pushing for the Government to set up a scheme to distribute the shares to the general public for free but then set a floor price.
It would mean that when the shares are sold the Government gets the floor price while individuals keep profit from the share price.
CPS head of economic research Ryan Bourne says: “The best solution is to get the bank into the private sector as quickly as possible, maximise returns to the Treasury and reward taxpayers for helping to rescue the banks when no one else would take the risk.
“Some in the Treasury are quite keen on it but lots of bean counters object to it on the basis that it would be bureaucratic and complex. With modern technology we could do it very easily so it is a political decision.”
Policy Exchange is recommending a ‘Tell Sid’ privatisation similar to the private sector sales of gas and electricity firms in the 1980s and is publishing detailed proposals in the week before the banking commission publishes.
The archbishop of Canterbury Justin Welby favours splitting up RBS and creating a series of regional and mutual banks in its place.
Booth says: “There are two strong arguments relating to widespread or narrow share ownership. In other words a model that disperses shares across the whole electorate against a model that is a straight forward private sector sale with concentrated ownership.
“There are some people on the commission who would like to see more models or ownership such as mutuality so they would be in favour of wide ownership. But there are problems with corporate governance from wide ownership as there is less incentive to monitor the firm and vote as shareholders. I do not know which argument will win out.”
How can the regulator incentivise whistleblowers?
The banking commission has also held long discussions about the future role of whistleblowers and how to incentivise more people to come forward.
In February, FCA chief executive Martin Wheatley told the commission he would consider paying whistleblowers if it was successful in the US.
The commission is likely to put forward proposals on how to improve the UK whistleblowing system in financial services to tackle scandals such as Libor rigging.
Garnier says the current whistleblowing system is “fundamentally flawed” and could not prevent PPI misselling.
He highlights a major bank with 150,000 staff only having 400 cases of whistleblowing in 2012, with many claims vexatious and only a handful relating to fraud or aggressive marketing.
He says: “For PPI if you are a frontline member of staff you cannot go to your whistleblowing team because it is an approved bank product. They are not going to start checking the approval of the bank just because someone on the high street does not like it. It has been suggested they could turn to their trade union but they do not have the expertises.
“It ends up with an endless loop for a fundamentally flawed system. The banks just are not getting their head around that they are in a special place in people’s lives like doctors and lawyers.”
Last week, Money Marketing revealed the Financial Conduct Authority does not check the progress of whistleblowing claims once they are passed on to the relevant department. The regulator says it is in the process of updating its records.
Hudson & Green Associates principal Ian Hudson is opposed to anonymous tip-offs as it could lead to vexatious claims and says paying whistleblowers should not be introduced.
He says: “Banks should be striving for quality but paying whistleblowers would be an example of the compensation culture gone mad.”