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Challenges and Solutions for Banking UK

There were two interesting documents released yesterday, and worthy of mention here.

The first is an official House of Commons Library publication:
Download Key Issues for the New Parliament 2010 (8 Mb pdf). 

Two pages of the 72 page document are dedicated to the future of financial services.  What does it say?  Here's the text:

“There can be few policy areas of comparable size with a bigger ‘in-tray’ than that of financial regulation and services. While the world hesitantly recovers from the global financial crisis, its legacy is a profound re-examination of the adequacy of existing legislation and institutions, together with a consideration of just what society wants and expects from its financial institutions.

“CONTRADICTORY OBJECTIVES

“This consideration will inevitably involve making a choice between potentially inconsistent or irreconcilable outcomes. For example,

“Banks should be forced to raise more equity capital to make them stronger.

“Banks should be subject to higher taxation and controls on profits.

“BUT new equity is hard to raise if banks’ profits are permanently lower in future.

“Or,

“Bank lending should be more tightly controlled by restrictions on ‘leverage’.

“BUT banks should lend more to industry and individuals.

“QUESTIONS TO BE ANSWERED

“The issues currently facing regulators and legislators include:

  • Capital adequacy – how much and what quality of capital should banks and others be forced to hold?
  • Liquidity – what level of liquid resources should banks retain? What should these consist of and how should they be measured?
  • Size – should there be controls on the size of financial institutions? If so, should it be by way of splitting the banks by function, or by quantitative controls on the levels of business they can carry out? If not, might they be forced to pay a surcharge as an insurance policy against the consequences of future failure?
  • Remuneration and ‘corporate governance’ – what structures need to be put in place to improve internal controls?
  • Other agents and influences – what should be done regarding credit ratings agencies or short-selling hedge funds? Did the accounting profession and its standards contribute in some way to the problem? How ‘complex’ should complex financial instruments be allowed to be?
  • Lastly, the regulatory system itself – is there a role for a more formal international supervisory system? If so, what powers and sanctions should it have over national authorities? What actually is macro-prudential supervision?

“How will the UK Parliament make its voice heard in international discussions of the future of banking?

“These issues will be decided upon at a variety of different policy levels. While some will be purely ‘domestic’ – for example, the future
regulatory structure in the UK – others, such as broad principles on capital adequacy, will be agreed on by international regulators in Basle and subsequently form the core of new European Union directives for implementation in EU Member States. In the UK, implementation might be by national legislation or by rules made by the current independent regulator, the Financial Services Authority (FSA), outside of Parliamentary control or scrutiny. One challenge for the future Parliament is to be able to exercise its voice and express its opinion within this framework.

“The end of the cheque could disproportionately affect the most vulnerable firms and individuals

“DOMESTIC CONCERNS

“For Members for whom (saving) the world is not enough, an important domestic agenda awaits that they will find hard to ignore.

“By 2012 bank cheque guarantee cards will be withdrawn. By 2016, the Payments Council will have decided whether or not cheques should cease to be a recognised method of payment. The next five years therefore will see this argument unfold in public. The issues are likely to be the impact on groups that still use cheques – the elderly, small firms, traders etc and the adequacy of any technological replacement.

“‘High cost credit’, or the provision of sub-prime credit to individuals excluded from the mainstream banks, is currently being reviewed by the Office of Fair Trading. When it publishes its conclusions, anticipate a lively debate over the balance between control, regulation and credit accessibility. More generally, the terms and conditions under which credit is made available will change with the imminent transposition of the EU Consumer Credit Directive.

“Last, but by no means least, approximately 10,000 small independent financial advisers are likely to cease trading following the FSA’s Retail Distribution Review. The review was the response to the long-running complaint that a commission-driven sales model has contributed to past mis-selling scandals of financial products. Arguments stressing the commission system’s lack of transparency and its potential for conflict of interest between seller and customer will be set against fears that, when faced with up-front charges, individuals will be put off seeking much-needed financial advice.

From consideration of the global regulation of credit derivatives to the possible death of the cheque book, from bankers’ bonuses to credit for the poor, from ‘too big to fail’ to too small to survive, there is much for Members to consider and decide upon in the next five years. Watch that in-tray.”

Interesting stuff.

Responding to this straight away, the new coalition Conservacrats published their document:
Download The Coalition programme for government (500 Kb, 36 page document).

The first priority, #1, number uno, is banking. Here’s what they’re going to do:

“In recent years, we have seen a massive financial meltdown due to over-lending, over-borrowing and poor regulation. The Government believes that the current system of financial regulation is fundamentally flawed and needs to be replaced with a framework that promotes responsible and sustainable banking, where regulators have greater powers to curb unsustainable lending practices and we take action to promote more competition in the banking sector. In addition, we recognise that much more needs to be done to protect taxpayers from financial malpractice and to help the public manage their own debts.

  • 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.
  • We will introduce a banking levy and seek a detailed agreement on implementation.
  • 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.
  • 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.
  • We will develop effective proposals to ensure the flow 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.
  • 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.
  • 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.
  • We rule out joining or preparing to join the European Single Currency for the duration of this agreement.
  • 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.
  • 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.
  • 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.”

Alright?  'Nuff said?

… watch this space.

 

About Chris M Skinner

Chris M Skinner

Chris Skinner is best known as an independent commentator on the financial markets through his blog, the Finanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal’s Financial News. To learn more click here…

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