60 second guide to banking reform Proposals of the Independent Commission on Banking

13 September 2011

canary wharf

The government has invested billions of taxpayer pounds in the banking sector

On 12 September, Sir John Vickers delivered his report on how the banking industry should be radically reformed to prevent another financial crisis and remove the taxpayer guarantee against bank failure.

The reforms are wide-ranging and the proposals from Vickers’ Independent Commission on Banking (ICB) change the banking landscape in the UK. Here’s a rundown of what the ICB has recommended and what effect it might have on you.

Ring-fence of retail banking

By far the most radical reform is the proposal to ring-fence retail banking from investment banking. This means that any deposit-taking services or loans and overdrafts to consumers and small and medium-sized business will be separated from the rest of the banks' operations.

The reason for doing this is to allow the riskier investment banks to fail if they make poor decisions or run their businesses in an imprudent way, thus removing the liability of government (and in turn, taxpayers) to bail out the banks in the future. The retail bank must have its own board and no director will be able to be on both the retail and investment banking boards.

Vickers has stated that the banks should be given to 2019 to implement their ring-fences. His report estimates that this will come at a cost of around £6 billion.

Impact on you

With the extra costs that come with putting a ring-fence around retail operations in banks, there are concerns that the cost of lending will be higher, and that rates payable on savings accounts will be lower. Which?, however, believes that these concerns are unfounded.

These strict rules could also lead to big banks like Barclays relocating to other, more lenient countries, which would have a huge impact on economic growth in the UK, but none have stated that they are considering leaving the UK as yet.

Higher capital requirements

Vickers wants to see banks holding more free money to absorb any shocks or losses in the future. New global regulations will see the level banks need to hold increase to 9.5%. The ICB wants banks to hold 10%.

In addition to this, Vickers has proposed that people who have lent to the banks pick up the tab if the bank runs into difficulties, and that the debts owed to these lenders should be used to help the bank out of its troubles.

Impact on you

With banks needing to keep more behind to act as a buffer to protect them, it can do a number of things to achieve it. It can raise more money by issuing shares or bonds, but also it could make fewer loans, call in loans or make fewer loans to riskier ventures.

Improving competition

The Vickers report states: 'There are long-standing competition issues in UK retail banking… the largest four banks account for 77% of personal current accounts and 85% of SME current accounts. Competition between banks on current accounts is muted by difficulties of switching between providers and by lack of transparency about banking services on offer.

'In short, consumers are often not well placed to make informed choices between effectively competing suppliers of banking services.'

Vickers wants the multitude of Lloyds branches to be sold to a 'viable challenger' to the banking sector to improve competition on the high street. He also states that an account redirection service should be introduced by 2013 to make it easier for consumers to change their bank account. 

This service, the report says, should 'transfer accounts within seven working days, provide seamless redirection for more than a year, and [be] free of risk and cost to customers.'

Impact on you

This could be a real benefit for consumers, allowing them to switch bank accounts if they’re unhappy, without worrying that their bills won't be paid. Vickers says that the redirection service should 'boost confidence in the ease of switching and enhance the competitive pressure exerted on banks through customer choice.'

With this competitive pressure, the hope is that banks will improve their services to consumers.

More on this

  • Which? chief executive Peter Vicary-Smith talks about banking reform on the Which? Conversation
  • Find out more about our campaign for better banking
  • Which?'s banking manifesto - have the proposals met our demands?