Independent Commission on Banking (ICB): Government White Paper — Transforming the Industry
Simon Rose | firstname.lastname@example.org | 07825 323 015
The principles of the ICB's recommendations have been endorsed by the Government in its recent White Paper on Banking Reform. However, it is the details of the regulations which will determine whether they deliver stability and competition. Fundamental details such as corporate governance and permitted funding structures will determine the efficiency of the banking system in terms of the supply of credit and whether the measures remove systemic risk. The details will also determine whether the banking sector becomes even more concentrated or becomes more contested. There are few details of what the ICB had in mind by 'effective competition', but the dominance of existing banks, malpractices and misallocated credit suggest there is real scope for improvement. It is rare that our long term prosperity depends so much on the details of legislation.
The public debate
If there is a silver lining in the recent interbank scandal, it is that the public debate on reforming the banking sector is now centre stage. Commentators and editors are now casting a more critical eye on the ICB proposals and are asking if the remit was wide enough and whether or not the recommendations go far enough. Academics around the world are examining the relative merits of policies and as the economy continues to stagnate the case for deeper reform is likely to increase.
Government White Paper
The White Paper has no major surprises and is in line with expectations; broadly, ring-fencing will happen as per the original Vickers proposal. The White Paper contains a few small, but welcome, changes to the original ring-fencing proposals, such as permitting ring-fenced banks to provide ‘simple’ derivative products to their customers. However, careful definition of these products will be required and there will possibly be limits on customers – both personal and SME.
The entire industry will be affected. Even if a firm is not within the ring-fence, their competitors will be changing their business models to reflect the developing competitive environment.
Whilst the devil is in the detail, there’s still a huge amount of clarification needed for the industry on the proposed regulations. It is the biggest change in the UK banking landscape sine the creation of limited liability banks one hundred and forty years ago and it will affect customer choice, staff incentives, investor behaviour and even the performance of the regulators.
When finalised, the regulations will inevitably require interpretation: the risk is that each firm will make different interpretations of the regulations – thus causing confusion and complication where the rules are not properly clarified – such as restrictions on products and the exact nature of intra-group relationships. The biggest area of concern for banks is the significant expectations which the government has put forward around governance; these will require considerable thought to enable banks to operate efficiently while upholding the essence of the regulations.
At publication, the government has offered out to consultation, fourteen questions to the Banking sector: these are examples of the areas out for consultation:
- SME Definition – setting quantitative limits to be used to determine whether a firm’s deposit base must be held by a ring-fenced bank.
- Definition of High Net Worth Individuals – suggesting free and investable assets to be between a range of £250,000 to £750,000.
- Restrictions on Types of Institution – seeking to restrict those to which ring-fenced banks have exposure and who engage in prohibited activities; facilitating payments and managing liquidity for other financial institutions will not be prohibited.
- Ancillary Activities – proposed secondary legislation for exemptions to prohibited activities. For example, to allow ring-fenced banks to package cash flows (securitisation) to fund itself.
The government in its review of the Vickers report, feels there’s a case for exemption from ring-fencing for certain firms—those with less than £25bn of mandated deposits may be appropriate (c.87 percent of the banking sector by deposits will be covered by the ring-fencing), leaving 3 building societies needing to ring-fence.
Through provision of a draft bill for pre-legislative scrutiny, the government offered questions for consultation by 6th September. The final draft bill will arrive later in the autumn, making provisions for the measures outlined in the White Paper and taking in consideration the responses to the questions.
The immediate activity from the ICB proposals is for the switching of current accounts. The existing ToDDaSO system for changing payments and accounts will be rebuilt, and become known as the current account redirection service.
The current account redirection service is currently being developed by The Payments Council aims to go in to testing from January 2013 and be ready for deployment in September 2013. The government has fixed this timeline, and to date 97 percent of banks representing this market have committed to the launch date. It provides for a guaranteed seven-day switching period, is free to use, guarantees customers will suffer no financial loss, a thirteen-month transition period to auto-route any incoming/outgoing payments sent incorrectly, and it affects all users of the current payment services. This means the “agency” and “sponsor” bank relationship will become more important than ever.
The introduction of the ICB regulations will see a number of changes to the day-to-day operations of banks and building societies, wealth managers, private banks with the most immediate changes being an enforced competition requirement for consumer switching of current accounts.
The legislative impact to consumers and the banking sector will be profound. Firms will see a reduction in profits, simplification of products, increased switching of current accounts, and more pertinently, major changes to corporate culture, staff knowledge, changes to the regulatory bodies, a need for new business operating models and management information, changes to board directors, as well as huge expense and reduced profits.
Some key questions to consider:
- Have you begun to review your business model and how it will be separated?
- How will this impact shareholders and society members?
- Have you considered your funding arrangements and apportioned your capital and liquidity requirements yet?
- Have you reviewed your suite of products?
How Navigant Can Help
Navigant and the National Institute for Economic Research (NIESR) are leading an industry-wide research project on ICB and its impact on the future of UK banking. The project is co-funded by the Economic and Social Research Council (ESRC) and the private sector. The NIESR have letters of endorsement from HM Treasury and the Bank of England who are keen to get an independent assessment of the role and needs of smaller banks in creating an effective banking system.
Navigant will be establishing a consultation forum to enable banks have an opportunity to participate to:
Influence areas of research and participate in the early review of findings
- Attend and participate in industry round tables with peer organisations to discuss their views on changing banking and regulatory environment including unintended consequences
- Contribute to policy responses and engage with policy makers
- Be positioned prominently in published reports and media coverage
If your firm is interested in hearing more about the research study please contact email@example.com and we will be happy to arrange a meeting.
Will You Be Ready?
Navigant can help you address all of the areas covered throughout the ICB proposals. We have deep industry expertise across Banking, Investment Management and Risk and Regulation. We have led the way on ICB, have strong relationships across government and are renowned for our knowledge of the Banking markets.
For more information, contact Simon Rose on 07825 323 015 or firstname.lastname@example.org.