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The three ways banking reform will shake up retail financial services

After three years in the making, reform of the financial services sector is entering its final stages.

The Banking Reform Bill, more than three years is in the making, is now heading into its final stages as it seeks to shake-up Britain’s financial services sector after a series of high profile scandals.

As the Bill moves into Third Reading in the House of Lords we look at three ways it could shake up retail financial services.

Approved persons regime

Bankers will be held to higher professional and ethical standards, potentially raising the bar across the industry.

Under the new approved persons regime senior persons will have to prove their innocence where there is wrongdoing.

The Treasury is being pushed to go even further and last week it suffered a defeat over Labour plans for a new licencing regime which would require bankers would take tough annual tests on ethics and professionalism. Labour still needs to win approval from MPs though, and separately lost its bid to impose a fiduciary duty on financial staff.

Shadow Treasury Chief Secretary Chris Leslie says: “As recent revelations show, an annual health check like this could help to spot problems and ring alarm bells.”

The new regime would only apply to deposit-taking institutions but the Treasury initially signalled the rest of the sector would join too.

Former FSA head of ethics David Jackman says: “As an industry we have proved unable to demonstrate integrity and care, so we have brought this on ourselves.

“If the industry genuinely understands the new regime is about the end user then it is a big step forward. If this whole exercise is reduced to yet more box-ticking then there is no point doing it.”

Leverage ratio

Mortgage lending could be significantly hit by changes to banks’ minimum leverage ratios, which aim to create safer institutions.

The UK is proposing a 3 per cent level in line with Basel III and European rules. The Independent Commission on Banking went further, calling for a 4.06 per cent level. It has branded current rules as “extremely weak”.

Last week the Treasury caved to pressure by agreeing a 12 month review on whether the Bank of England should have powers to raise the leverage ratio.

The Building Societies Association has warned a 1 per cent increase in leverage would cripple mutual mortgage books by 25 per cent and slash lending.

Responding to the review, the BSA said: “There is a real risk of perverse incentives and the potential of a seriously adverse impact on businesses with concentrations in low-risk assets if the UK gold plates or front-runs international or EU agreements over leverage ratios.”

Ringfence vs separation

Ringfencing will mean investment profits can no longer subsidise retail products although what is included in the ring-fence is still murky.

In the face of heavyweight political pressure, the Treasury has made a tentative move towards full separation. 

Last December it agreed to “electrify” the ringfence by retaining a reserve power to separate individual banks over wrongdoing. It has also created a statutory review of ringfencing to assess reforms and consider separation.

There is a big debate over whether ringfencing will prevent products such as interest rate swaps being sold by retail banks.

Lansons Communications director Ralph Jackson says: “There needs to be a degree of certainty because if you are a current operation that knows you will be ringfenced you need to know what products can be included.

”I remember [former Treasury financial secretary] Mark Hoban saying mortgages can be complex derivative products, so it is important the ringfence is clearer from a retail perspective.”

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