The devil is in the detail in the government’s plan to ringfence UK banks
HOW often have you heard executives chuntering on about “red tape”? Sometimes, however, regulations affect people who don’t voice their concerns quite so loudly – customers. This is because the implications of such regulations are not always obvious, not least to the consumers or small businesses that would be affected.
I have a few concerns about the government’s Banking Reform Bill, which – unless important changes are made in the final stages of its passage through Parliament – could pose problems for small firms, exporters and high net-worth individuals.
Its cornerstone is the introduction of ring fencing – separating investment banking arms from high street banking operations. This was recommended in the final report by Sir John Vickers’s independent commission on banking in 2011. It also featured in two government consultations and a pre-legislative scrutiny exercise carried out by the Parliamentary Commission on Banking Standards.
We and our members support ring-fencing in principle, and have worked with the government to ensure the proposed law is right not just for banks, but for the wider economy. Ring-fencing aims to end “too big to fail” and avoid future taxpayer support in the event of a bank failure. Hard-wiring measures like recovery and resolution planning will help to achieve this. But as law-makers in the US and EU will agree, replacing a risk-based approach with a statutory list of what’s “in” and what’s “out” is no simple ask.
There is a chance that the Bill could undermine small firms hoping to win export contracts. Straightforward types of trade finance currently find themselves outside the ringfence, meaning businesses would not be able to get them directly from their bank. Ring-fenced banks would be allowed to provide businesses with some “simple” derivatives to hedge risk, like interest rate and foreign exchange swaps and forwards. Yet “simple” options are excluded. This might even prevent companies involved in transactions with ring-fenced banks from benefitting from break clauses.
The additional bureaucracy around planned certification requirements to allow high net-worth individuals to deposit with non ring-fenced banks could also pose problems. It may make wealthy people jump through more hoops before they can invest in more sophisticated products. This threatens to undermine private banking – a growth area in UK financial services.
The Office for Fair Trading already has a simpler formula for obtaining customer validation. Adopting a similar procedure would offer continuity, and complement existing legislation.
Businesses, and SMEs in particular, often want a one-stop-shop where they can go for their banking services. I can think of few people who would enjoy the extra form-filling of going to one bank for some financial products, and then another for other services.
These points may appear “technical”. But that does not mean their impact should lie beyond public scrutiny. In balancing Vickers’s aim of protecting retail customers while meeting their reasonable banking needs, we must keep sight of this. When laws draw the line in the wrong place, consumers and businesses of all sizes can suffer.
Anthony Browne is chief executive of the British Bankers’ Association.