Banking

In 2010 the task of the Coalition was to restore Britain as a global financial leader with post-crash regulatory architecture and business conditions to foster economic growth.

From a legislative perspective, a central achievement of the Coalition Government in Parliament is the passage of the Financial Services Act which received Royal Assent in December 2012 and took effect in April 2013. This has fundamentally restructured the regulatory architecture overseeing financial services in the UK, not least by granting the Bank of England oversight of macro and micro prudential legislation, replacing the Financial Services Authority (FSA). The significance of the legislation should not be underestimated, it clearly sets out where accountability falls in the post-2008 landscape, during which the FSA was discredited for its failure to understand its role in the financial crisis. As the Chairman of the Treasury Select Committee, Andrew Tyrie MP, stated in July last year: “the Financial Services Bill is the most important overhaul of financial regulation ever undertaken in this country.”

If the Government might have benefited from a cross-party consensus on what the post-tripartite regulatory landscape should look like during the passage of the Financial Services Bill, it faces a greater challenge as it steers the Banking Reform Bill through Parliament. The intention of the Bill, set out in the Banking Reform White Paper, is to implement the headline proposals of the Independent Commission on Banking (or the ‘Vickers Review’) by separating retail and investment banking functions through a ring-fence by 2019. Concerns remain, however, that the legislation will be watered down as it progresses through Parliament, as recently voiced by the Parliamentary Commission on Banking Standards.

At boardroom level, the reforming zeal previously shown by the Secretary of State for Business, Innovation & Skills, Vince Cable MP, has lost its momentum. Reforms over corporate governance structures in respect of remuneration have stalled. In March 2012 he issued a consultation stating that he “wanted shareholders to feel empowered to prevent rewards for mediocrity or failure.” Cable is keen to instigate a second ‘shareholder spring’, allowing investors a binding vote on boardroom bonuses. The Government is not expected to legislate on this until October 2013 and, as is currently widely reported, it is likely that it will climb-down from proposing a yearly to a three-yearly ballot for investors.

The Prime Minister’s relations with Brussels in respect of finance and banking have been fraught since he used his veto to block an EU treaty outlining a fiscal union. While the broadsheet media has been questioning whether the Prime Minister could be trusted protect the city, the situation in the Eurozone deteriorated even further. Cameron and Osborne currently face the challenge of protecting the presence of UK banks within the European Single market while providing absolutely no indication that they advocate closer monetary or financial union.

In terms of next steps, the Government must now look past the wreckage of the financial crisis. While it progresses – however slowly – with its priority reforms, it should look to foster real diversity and competition on the high street.

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Progress against the Coalition Agreement

Pledge: We will reform the banking system to avoid a repeat of the financial crisis, to promote a competitive economy, to sustain the recovery and to protect and sustain jobs.

Status: In progress – The Government introduced the Banking Reform Bill to Parliament in February 2013. The legislation – which outlines measures to ringfence core retail financial services, increase banks’ loss absorbency and enhance competition in the sector – is currently undergoing its passage through the House of Commons (in Public Bill Committee at the time of writing).

Pledge: We will introduce a banking levy and seek a detailed agreement on implementation.

Status: Done - This was introduced by the Finance Act 2011 and took the form of an annual tax on all UK bank debts with particular exemptions. The tax also applies to funds deposited within banks. The Chancellor announced at the 2013 Budget that the rate would rise to 0.142 on all bank liabilities.

Pledge: We will bring forward detailed proposals for robust action to tackle unacceptable bonuses in the financial services sector; in developing these proposals, we will ensure they are effective in reducing risk.

Status: In progress - A particular initiative is being led by the Business Secretary, Vince Cable MP, who is consulting on measures which include giving investors the right to a ‘binding’ vote on remuneration pay schemes at quoted companies, replacing the ‘advisory’ vote that was introduced under the Labour Government. It is understood that a measure which allows a vote to take place every three years, as opposed to the yearly ballot advocated by Cable, will be implemented, subject to Parliamentary approval, in October 2013.

Pledge: We want the banking system to serve business, not the other way round. We will bring forward detailed proposals to foster diversity in financial services, promote mutuals and create a more competitive banking industry.

Status: In progress – The Government announced the sale of Northern Rock Plc to Virgin Money, a tangible step towards fostering diversity in high street retail banking. With respect to promoting mutuals HM Treasury issued a consultation paper, The Future of Building Societies, but is yet to announce its next steps in terms of implementation.

We will develop effective proposals to ensure the low of credit to viable SMEs. This will include consideration of both a major loan guarantee scheme and the use of net lending targets for the nationalised banks.

Status: Done -The Government allocated £1bn to the creation of a British Business Bank, aimed at providing a source of financing for SMEs, a move that was seen as a positive step by business organisations such as the CBI and the British Chambers of Commerce. The Bank would focus on issuing long-term loans with maturity rates up to ten years. This followed the announcement by the Chancellor in March 2012 of a National Loan Guarantee Scheme which promotes cheaper access to credit for UK businesses by reducing the cost of bank loans under the scheme. The Government also introduced Project Merlin in order to agree net-lending targets for nationalised banks. While the legislative and regulatory architecture in this area has been established, the lending system has not fared well in the short term (with banks consistently missing targets). However, it is the former that the Government is judged on in this instance.

Pledge: We will take steps to reduce systemic risk in the banking system and will establish an independent commission to investigate the complex issue of separating retail and investment banking in a sustainable way; while recognising that this will take time to get right, the commission will be given an initial time frame of one year to report.

Status: In progress – The Government will implement the legislation, in the form of the Banking Reform Bill, by the end of the fixed term Parliament in 2015. Full implementation of the reforms recommended by the Independent Commission on Banking, Chaired by Sir John Vickers, is not expected until 2019 however. Banks will be given until 2019 to implement these reforms and ring fence their high street operations.

Pledge: We will reform the regulatory system to avoid a repeat of the financial crisis. We will bring forward proposals to give the Bank of England control of macro-prudential regulation and oversight of micro-prudential regulation.

Status: Done – The Financial Services Act 2012 provides the legislative framework for the Bank of England’s control of macro and micro prudential regulation, through the creation of the Financial Conduct Authority and the Prudential Regulation Authority which will both act as independent subsidiaries. The Act received Royal Assent in December 2012.

Pledge: We rule out joining or preparing to join the European Single Currency for the duration of this agreement.

Status: Done – David Cameron has repeatedly pledged not to join the European Single Currency. Most recently during his January 2013 speech which set out the offer of a referendum on the European Union if a Conservative Government is returned in 2015, he stated “as I have said, we will not join the single currency”.

Pledge: We will work with the Bank of England to investigate how the process of including housing costs in the CPI measure of inflation can be accelerated.

Status: Done – The new CPIH measure of Consumer Price Inflation was launched in March 2013 by the Office for National Statistics (ONS) and includes the cost of housing within its calculations.

Pledge: We will create Britain’s first free national financial advice service, which will be funded in full from a new social responsibility levy on the financial services sector.

Status: Done – The Government launched the Money Advice Service in August 2011, replacing Money Made Clear, a service provided by the Consumer Financial Education Body, part of the Financial Services Authority.

Pledge: We take white collar crime as seriously as other crime, so we will create a single agency to take on the work of tackling serious economic crime that is currently done by, among others, the Serious Fraud Office, Financial Services Authority and Office of Fair Trading.

Status: In progress – The Crime and Courts Bill, currently undergoing its passage through Parliament, will legislate for the National Crime Agency. This will in turn establish the Economic Crime Command, an agency which will provide a national strategy for countering economic and financial crime. The agency will relieve the Serious Fraud Office, Financial Services Authority and the Office of Fair Trading of their responsibilities in this area.