What will the banking reforms mean for you?

Posted in: Professional Finance- Sep 12, 2011 No Comments

The British banking system is facing a huge shake-up. The Independent Commission on Banking (ICB) has today published a long-awaited report that makes recommendations about radical changes to the structure of our high street banks.

The government commissioned the report following the impact the financial crisis had on the banks’ retail customers.

The core recommendation is that the retail divisions of the banks should be ring-fenced from the institutional arms to protect consumers in the event of crises such as those that caused the run on Northern Rock and the collapse of the Icelandic banks.

While the changes will take some time to take effect, John Vickers, head of the ICB, has called for the reforms to start as soon as possible and be completed by 2019.

Kevin Mountford, head of banking at MoneySupermarket said: “The ICB’s report has been long awaited and it comes as no real surprise that the focus of the findings is around the ring-fencing of retail banking operations from their investment arms.”

The ICB’s recommendations are not just restricted to measures to protect the banking system, taxpayers and customers from potential financial crises, though.

It also aims to enhance competition so that consumers get a better deal.

We answer your questions about the ICB reforms and just what they will mean for you.

How will ring-fencing banks’ retail operations affect me?

The main aim of this recommendation is to avoid consumers and taxpayers being adversely affected in the event of another banking crisis.

Given that the credit crunch was partly caused by borrowers defaulting on their credit agreements, the new ring-fenced banks will also be required to maintain a minimum ratio of equity to their risk-weighted assets of at least 10%.

For every £10 they lend out, they must therefore hold at least £1 in reserve against potential losses.

The ICB estimates that taxpayers will benefit from an annual reduction in the implicit subsidy to the industry of at least £2 billion, while customers will enjoy greater protection and peace of mind as a result of this.

However, the reforms are also expected to cost the banks up to £7 billion a year, and there are fears that this will prompt them to up the cost of borrowing for consumers.

Mountford said: “The main concern of these recommendations is the additional costs on the banking sector, which could either be passed on to customers in some shape or form, or see a number of banking operations moving their head offices away from the UK.”

How will the reforms boost competition?

The ICB report stresses the importance of establishing a large new bank to compete with existing ones – the number of which has diminished considerably in the last few years.

To achieve this, it argues that Lloyds, which became much bigger after taking over HBOS in 2009 despite its earlier Government bail-out, should be forced to “substantially enhance” the sell-off of at least 600 branches already ordered by the European Commission.

It also wants the Government to ensure that the bank that takes on the 632 or more branches sold by Lloyds has at least a 6% share of the personal current account market, creating “a strong and effective new challenger”.

And in a bid to encourage more consumers to switch their current accounts, the report suggests that a free, industry-wide account redirection service should be in place by 2013.

The aim of this would be to make the switching of current accounts a “seamless” process by ensuring that all payments in and out of an old account are re-directed into a new one within seven working days.

Consumers using the service would also have a guarantee protecting them against any losses made as a result of mistakes.
“Adopting an improved switching system will help eliminate some of the horror stories witnessed with account switching in the UK,” Mountford added.

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