by Maya Robert
Here’s a simple breakdown of the The Independent Commission of Banking (ICB) report (sometimes known as the Vickers report) and how it may affect the way we bank:
1. What is the ICB report?
The ICB report, headed by Sir John Vickers, was commissioned following the crash of several UK banks and the resulting ‘bail-outs’ which ensued. It was tasked with reviewing the way the banking industry was conducted both from a consumer point of view, as well as the overall structure of financial institutions in the UK.
The ICB report namely reviewed:
- how the industry could ensure that banks will not collapse in the same way as they did during the recession;
- how to avoid future bail outs;
- how banks could be more competitive.
2. What is ring-fencing?
One of the most talked-about measures in the ICB report was what is commonly referred to as ‘ring-fencing’. This means that banks will have to separate almost completely their retail divisions from their other activity. This means that the retail aspect of the banks (which holds our current accounts and mortgages etc) will be legally separated from its investment departments. This is an attempt to insulate the retail divisions from the increased risk involved in the investment arm of the banks. At least 10% of the banks’ capital will have to be in its retail branch.
3. What else will change?
The ICB report also recommended that switching current accounts should be an easier and altogether less daunting task, taking only 7 days to complete. That said, online comparison services help immeasurably to make switching to a better current account as pain-free as possible. Hopefully the ICB proposals will help to change the persisting perception of process.
The Committee also wants to see better transfers of standing orders and Direct Debits when customers do switch, as well as banks more eager to attract customers.
The ICB is also urging more competitiveness in the banks, with those with a larger share of the market forced to sell off some of their holdings. By doing this, it is hoping that smaller banks will be able to emerge leading to more choice on the high street.
Most notably, this is likely to affect Lloyds TSB, which owns around 30% of the market share.
Banks will also have to be suitably prepared to absorb more losses from the Retail Market should they fail.
4. How will this affect me?
They say you’re more likely to divorce than switch your bank account. The ICB’s suggestions might finally make it easier to do so, meaning customers will be able to take advantage of better deals and, if they are unhappy with their banks’ services, vote with their feet.
There is also an idea that customers will benefit from a banking system that is more competitive and therefore more likely to offer competitive products.
Most importantly, though, it is aimed at making the banks more resilient to loss, so that if there is another financial crash, they will be more capable of absorbing it independently.
5. When are these changes going to happen?
I’ll hand over to George Osborne on this one, who said:
“John Vickers (ICB head) himself sets out a timetable and I intend to stick to his timetable.
“So he says let’s have all the changes in place by the end of this decade.
“There are a lot of changes involved, that is why it will take some time, but let’s get the legislation through in this parliament and we have a commitment to legislate to get the rules in place … and then it will take some time for the full rules to come in.”
The Commission has stated that banks “should be strongly encouraged to implement any operation changes as soon as possible” with key changes taking place by 2019.
So what’s all the controversy about?
There are several points of concern both from the customer and business point of view.
For instance, some believe that restructuring the banks incur a hefty cost (anywhere between £4 and £8 billion), which will inevitably be passed down to customers, while others think that excess regulations will mean the City loses its standing as one of the leading financial capitals of the world.
However, the ICB has allowed for a great deal more flexibility than expected when it comes to deciding what falls inside the retail ‘ring-fence’, which has appeased some initial concerns from banks.
Optimistically, according to the Commission, many believed the regulations could ‘resolve and reduce the Government subsidy to banks’, which is good news for tax-payers.
Hope this blog post has helped and don’t forget to leave a comment if you have any opinions or questions for me!