Fishburn Hedges

21.07.2010

A new regulatory regime is on the way for financial services and the City but it is not yet clear what this will look like.

Our recent event explored the reforms currently under debate, in particular what should happen and what is likely to happen.  These were not the same thing.

The speakers were:
- Philip Augar: banker, commentator, City historian and member of the recent Which? Future of Banking Commission
- James Mackintosh: Investment Editor of the FT and writer of The Short View

Key conclusions were:
- The Government will introduce “politically acceptable” changes, but these will not bring the radical reform needed to avoid another crisis
- The institutions will remain either too big or too connected to be allowed to fail, but they should be broken up
- Hence ‘flawed’ business models will remain until the next crisis forces a further re-examination of the regulatory landscape
- Consumers should encourage more competition in retail banking by exercising choice, but opinion was divided on whether the banks should be more transparent

Watch the video

What should be done?

James Mackintosh argued that many banks, with 145 banks holding over £100 billion in assets, remain “too big to fail”, i.e. governments could not allow them to fail because of the potential consequences for the wider economy.

In his view, the proposed taxation-based measures (levies etc) will not adequately change industry behaviour and they barely scratch the surface of the £50 billion per year that the UK Government provides in implicit guarantees to the banking industry.

Hence, the only way to bring them under control is to reach a position where they are allowed to fail within a free market.

Philip Augar agreed and argued that the new regime should:
- Decouple retail banking by ring-fencing it or separating into a stand-alone company
- Split the lending and treasury functions of  commercial banks
- Break investment banks into two parts – those trading for clients and those advising investors (to avoid conflicts of interest where a bank represents both sides)

What will be done?

The era of light touch regulation has passed, governments are talking a tougher game and regulators are taking an enforcement-led approach.  But will this deliver real change for the better? In short, no. 

Both speakers agreed that a clampdown is unlikely under the present Government, due to the strong links between the City and the senior Conservative team.

Augar thought one ray of hope was Vince Cable (Secretary of State for Business, Innovation and Skills), who should play a key role in the discussions that will follow the Banking Commission report in September 2011.

The speakers also agreed that “politically acceptable” reforms will increase the regulatory restrictions and requirements on capital, leverage, scrutiny and taxation. But these reforms will not deliver the necessary radical change.

In the absence of radical structural reform, Augar was concerned that flawed business models will remain, leading to another crisis one day.  In time, this that will force significant change as the moment has now passed.

How to improve banking for consumers?

Mackintosh highlighted that a handful of large banking groups now dominate the market and whilst there is rivalry, there is little real competition. 

Consumers just don’t care enough to change providers – they are more likely to change their spouse than their bank account, despite the information that’s publicly available. 

Should the Government really be attempting to protect consumers here? Mackintosh argued that personal responsibility is the key and consumer choice is a better solution to a virtual nationalisation of retail banks.

Augar thought improvements were possible but that they would rely on enabling better information for consumers in terms of transparency of bank charges, clearer marketing material and making it easier for consumers to switch accounts.

For example, portable bank account numbers could be switched between rival providers (as in the mobile phone market).  Such measures could encourage consumers to exercise their choice more easily.

Equally, new entrants to the retail banking market may introduce such consumer-friendly innovations, thereby pressurising existing providers and ultimately increasing competition in the market.