Financial Services Bill: will banking reform actually work?

The Financial Services Bill aims to ring-fence consumer and investment banking. Matt Packer speaks to some experts and asks whether banking reform can really help the sector

For many, a pledge from Chancellor George Osborne to electrify anything would seem far-fetched.

But, in February, that is just what he promised, with respect to planned banking reform which would see a ‘ring-fence’ between the high-street operations of major UK banks and their riskier investment arms.

Two months beforehand, the Parliamentary Commission on Standards in Banking, chaired by Andrew Tyrie, had offered a stern assessment of the Government’s Financial Services Bill: the document that aims to enshrine that banking reform in law.

Tyrie urged legislators to include an ‘electrification’ clause, under which banks that worked around the obstacle would be forcibly broken up. It was Tyrie’s critique that helped to motivate Osborne’s pledge, made as it was in the face of trenchant claims from City lobbyists that banks had managed to keep their consumer and investment wings separate for decades through their own internal policies.

The question is: would such a break-up actually work? From everyday taxpayers and consumers to professionals in the world of finance, everyone has something to gain from a firm stewardship of banking reforms. AAT Comment spoke to representatives of those stakeholder groups to find out what they think of the planned measures.

Why the Financial Services Bill won’t work: Chris Skinner, founder of The Financial Services Club

If the question is, ‘Will the break-up of the banks work in the sense that it will stop banks from failing?’ the answer is no. If the question is whether the taxpayer will have to make further payouts in the future, the answer is also probably no.

The banks that failed in Britain actually had nothing to do with casino capitalism: banks such as Lloyds-TSB-HBOS [aka Lloyds Banking Group] were heavily securitised.

In the end, it all comes down to management. Robert Peston put it best in a recent blog, when he effectively said that if you have a bank that’s leveraged to the hilt, but run by godlike masters of finance, that’s better than having an apparently stable one run by a bunch of idiots.

However, because of recent Basel III legislation, the taxpayer is essentially safer. The problem is that, in the financial sector, memories are short – in the 70 years following the Great Depression, the sector developed a number of products and practices that naturally resulted in a complete mess.

Taxpayers should never foot the bill: The TaxPayers’ Alliance chief executive Matthew Sinclair

Billions of pounds of taxpayers’ money have been sunk into bailing out banks’ dubious investments. We have been left with huge risks, we are unlikely to ever see all our money returned… and yet many investors in the banks still have their shares and bonds.

It’s important that steps are taken to ensure taxpayers are never again left with hefty bills from the banks – but breaking them up won’t achieve this. Politicians should focus on curing the ‘too big to fail’ disease, rather than the symptom of ‘big banks’.

The best way to ensure that they behave more prudently in the future is to change the rules so that bank bosses and their investors know that all of their shares, bonds and bonuses would be wiped out before a penny of taxpayers’ money is spent on bailouts.

Commercial failure in banks must mean financial losses for bank bosses and investors. Not for taxpayers.

Why banking reform can work: The National Consumers’ Federation (NCF) Fairness in Finance Committee

It is very likely that a true split would result in us paying annual fees for current accounts. The NCF is primarily a grassroots consumer movement, concerned more with the relationship between the individual and his or her bank than structural issues.

However, we all as taxpayers find ourselves often unwittingly, and generally unwillingly, guarantors of the big banks that have proven too big to fail – yet are now too cautious to lend.

The question of whether a split of the banks’ ‘casino’ operations from their retail operations would work is a no-brainer: of course it can be made to work, if the banks are willing to give up the implicit subsidy from taxpayers [which creates a safety net and is therefore a disincentive for them to behave].

The subsidy is estimated by Bank of England stability guru Andy Haldane to be worth around £57bn per year. Would they willingly give this up? Another no-brainer: you can buy a lot of lobbyists with that clout, and the system is sufficiently complex and opaque to put the scare up regulators and politicians by saying that it won’t work.

UK banks must be made to work for customers: Which? executive director Richard Lloyd

The ring-fence between retail banks and their risky investment arms must be robust enough to ensure that consumers never again have to foot the bill for a banking bailout that has cost £2,000 for every man, woman and child in the country.

However, the ring-fence won’t protect ordinary customers against shoddy service – and we won’t see the big change that’s needed in banking unless more is done to increase competition and enforce high professional standards.

The Chancellor and Parliamentary Commission must both now go further and finish the job they started. To reset the sector, banks must be made to work for customers.

Bankers should be required to comply with a fully independent code of conduct backed by statute – and the Treasury should act to end the unhealthy dominance of the biggest banks.

More information about the Financial Services Bill – and its plans for banking reform – can be found on the special Parliamentary webpage.

Matt Packer is a freelancer journalist who has contributed to Accounting Technician magazine, 20 magazine and the CMI website.