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IMA: Should we go further and fully separate banking operations?

I imagine most of you will have clients who are invested in one way or another in banks – whether it be through direct investments, tracker funds, actively managed UK equity funds or indeed a pension.

And undoubtedly they will be asking you questions about the banks and their business models and what this means for their investments. What is the actual impact of recent attempts to manipulate LIBOR? Are we ever likely to find out? Were more banks doing it? What will the review of the LIBOR rate-setting process conclude? What will the Parliamentary Commission on Banking Standards come up with? And most importantly, what will all this mean for individual relationships with the banks in the future?

Regardless of the answers to these questions banks are still, and will continue to remain, an important part of the economy and our everyday lives. They enable us to borrow money, provide a variety of ways for us to pay for goods and services, protect retail savings, manage financial risk and provide specialist financial services through a wide range of products. That said, there are clear differences between the retail activity of a bank and the other, more risky, operations it undertakes. While the Investment Management Association supported the proposal in the Independent Commission on Banking’s final report to ring-fence a bank’s retail operations, we now believe it is right to question whether or not this actually goes far enough, and indeed some of our members consider complete separation is the way to go. This is one of the points we have made in our submission to the Parliamentary Commission.

In responding to the Commission we have said that the financial crisis and the recent banking scandals did not necessarily arise as a result of a lack of professional standards. They were more to do with changes to the structure of the banking sector and the underlying incentives over the last four decades. One of the problems is that the current focus on investment banking is rather different to the old style “relationship banking” of the retail side that used to dominate. The former is all about short-term activity generating big profits against a background of often excessive risk-taking and little regard for the long-term consequences.

So what are the consequences of all this? Consumers have been at the wrong end of the misselling of interest rate swaps and payment protection insurance. And consumer trust in banks has fallen, perhaps reaching an all-time low. Trust is also critical to efficient and effective capital markets and if a key player in those markets cannot be expected to act with integrity there is a detrimental knock-on effect on the whole of the financial services sector.

What can be done? At IMA we fully support any reform aiming to increase the protection of retail investors and improve financial stability. We also raise the question of the Commission addressing mis-selling in the context of a sales-based culture. How radical would it be for banks to stop paying sales commission to their staff and instead pay them bonuses linked to customer satisfaction, fair treatment of customers and proper complaints resolution?

Maybe then your clients would no longer need to be so wary of being invested in banks.

Mona Patel is head of communications at the IMA

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