The Independent Commission on Banking

The Financial Services (Banking Reform) Bill

On 4 February 2013, the Financial Services (Banking Reform) Bill was introduced to Parliament. The Bill brings forward the most significant reforms to the banking sector in a generation, and will make the banking sector safer, more resilient and more resolvable.

The draft legislation was scrutinised by the Parliamentary Commission on Banking Standards (PCBS) and the Government has made a series of amendments to the Bill based on their recommendations. The Government’s response to the PCBS, and the impact assessment, are contained within Banking Reform: a new structure for stability and growth, published alongside the Bill.

The Government is on track to have all legislation in place by the end of this Parliament (2015), and banks will be expected to have implemented reforms by 2019 at the latest.

Draft secondary legislation

The Government has deposited illustrative drafts of principal secondary legislation to be made under the Banking Reform Bill in the Houses of Parliament libraries in advance of the Bill’s second reading. The Government intends to formally publish later this year all the draft secondary legislation to be made under the Bill for public consultation.

Draft Financial Services (Banking Reform) Bill

On 12 October 2012, the Government published the draft Financial Services (Banking Reform) Bill, to implement the recommendations of the Independent Commission on Banking. The draft Bill is the first step in the legislative process towards a more resilient, stable and competitive banking sector. The Government remains on track to have all legislation enacted by the end of this Parliament (2015) and reforms will be in place by 2019. The legislation will now be scrutinised by the Commission on Banking Standards, chaired by Andrew Tyrie, prior to its formal introduction into Parliament. The Tyrie Commission will report by 18 December and the Bill will be introduced into Parliament early next year. This is in line with the Government’s timetable for implementation, as set out in the June Banking Reform White Paper.

Draft Financial Services (Banking Reform) Bill in easy-to-browse format

White Paper consultation

On 14 June 2012 the Government published its White Paper ‘Banking reform: delivering stability and supporting a sustainable economy’, which sets out the Government’s detailed proposals for implementing the recommendations of the Independent Commission on Banking (ICB), to fundamentally reform the structure of banking in the UK.

The Government will introduce all necessary legislation as soon as Parliamentary time allows, and remains committed to completing all primary and secondary legislation by the end of this Parliament in May 2015. Banks must comply with all of the measures proposed here by 2019, as the ICB recommended. The Government has undertaken an impact assessment of the Government’s proposals for implementing the ICB recommendations, which can be found in the annex to the White Paper.

The Government seeks views on the proposals in this White Paper and responses are requested by 6 September 2012. Responses can be sent by e-mail to: banking.commission@hmtreasury.gsi.gov.uk or by post to: Banking Reform Bill Team, HM Treasury, 1 Horse Guards Road, London, SW1A 2HQ.

White Paper in easy-to-browse format

Government response to ICB final report

On 19 December 2011 the Government published its response to the report by the Independent Commission on Banking (ICB), which sets out plans to fundamentally reform the structure of banking in the UK. This response agrees with the ICB’s recommendations and outlines how the Government will legislate to create a stable banking sector that supports lending to businesses and families, and removes the implicit taxpayer guarantee in the event of a bank failure.

The Government will implement the ICB’s advice in stages with the full package of reforms completed by 2019. All necessary legislation will therefore be put in place by the end of this Parliament. The Government will publish a White Paper in spring 2012 setting out further detail on how the recommendations will be implemented; in advance of that, the Government is open to views on how to implement these plans.

Government response in easy-to-browse format

Background

Individual financial institutions (particularly ‘universal’ banks, which combine both retail and investment banking arms) can pose risks to the financial system at large and threaten financial stability. They may also raise barriers to competition.

The Government believes that reform of the banking system is essential to avoid a repeat of the financial crisis, promote a competitive economy, support economic growth and ultimately protect and sustain jobs.

To this end, the Government established the Independent Commission on Banking (ICB) in June 2010.

The ICB will assess how to:

reduce financial stability risk in the banking sector, by exploring the risk posed by banks of different size, scale and function;
mitigate ‘moral hazard’ in the banking system - this is where institutions are insulated from the natural consequences of taking risks due to their size and importance;
deal with the issue of banks being seen as ‘too big to fail’;
reduce the likelihood and impact of firm failure; and
promote competition in both retail and investment banking.

Recommendations will be made around larger ‘structural’ reform, such as the separation of retail and investment banking activities, as well as smaller, ‘non-structural’ measures to promote stability and competition for the benefit of consumers and businesses.

Sir John Vickers is chairing the Commission, supported by Clare Spottiswoode, Martin Taylor, Martin Wolf and Bill Winters.

Terms of reference for the Commission (ICB website, opens in a new window)

Issues paper

The ICB published an Issues Paper on 24 September 2010 to structure the debate and invite submissions of evidence. Consultation responses were published on the ICB’s website.

Interim report

On 11 April 2011, the ICB published an interim report outlining key proposals for consideration toward improving stability in the banking sector, including:

greater protection for the retail operations of large banks, with retail banking activities established in separately capitalised subsidiaries; and
an improved loss absorbency regime to make it easier for banks and their creditors to absorb losses, including through additional capital requirements, ‘bail-in’ and extra protection for ordinary deposits, so all other sources of funding must be exhausted before these deposits suffer losses.

The interim report also made recommendations for improving competition in the banking sector, including:

that Lloyds Banking Group (LBG) divest more branches and customer accounts than already planned (LBG is already required to divest at least 600 branches as a condition of the state aid it received during the crisis);
that the industry agree on and implement measures to make it easier for customers to compare and switch personal current accounts; and
an enhanced role for the new Financial Conduct Authority (FCA) in promoting competition.

Consultation responses to the interim report were published on 13 July 2011 and were published on the ICB’s website

Government response

In his Mansion House speech of 15 June 2011, the Chancellor announced his support in principle of the ICB’s interim proposals in respect of:

ring-fencing high street banks to make them safer and protect their vital services to the economy; and
the introduction of ‘bail-in’ so that private investors, not taxpayers, bear losses if things go wrong.

The Chancellor also set out that the UK would continue to seek international agreement for a capital surcharge for systemically important financial institutions, as the ICB have proposed. He also supported the ICB’s view of the importance of competition in retail banking.

The Chancellor emphasised in this speech that reforms taken forward will however need to meet the following principles:

banks must be allowed to fail safely without affecting vital banking services and without imposing costs on the taxpayer;
any reforms must be applicable across our whole banking industry, with all its diversity; and
proposals must be consistent with EU law and the UK’s international treaty obligations.

Final report

The ICB’s final report was published on 12 September 2011. The Government is examining the ICB’s proposals in detail, including the costs and benefits of what has been proposed, and the design and implementation options.

It is the Government’s intention to provide its initial response to the Commission’s proposals before the end of the year, introduce any necessary legislation by 2015, and implement any resulting measures by 2019.

Final report - full document (ICB PDF 2MB)