Banking Reform

For 25 years before becoming an MP, I worked in finance, including 10 years from 1987 with Barclays, first in the dealing room and then as a Financial Institutions Director running the Banks team. This latest banking scandal takes me back to my experiences of the 'culture' that started post-Big Bang, and that continues to this day – in spite of the financial crisis. That is why I am convinced we must now draw a line in the sand.

Given the importance of banks to Britain's economic well-being, the recent revelations of mis-conduct by bankers is bad news for all of us. The time has come to say enough to tinkering with reforms. We need far-reaching measures to restore probity and credibility to the industry.

Well-functioning banks are crucial to an advanced economy such as ours. They are the oil which keeps the engine running. But hindsight shows that a small and powerful (but also unrepresentative) segment of bankers have, frankly, duped successive governments. The banking industry has had countless chances to heed the warning signals from government and regulators and to reform itself – but all the chances have been squandered. This points to only one conclusion. If our banking system is to meet the demands of today's global economy, it needs a significant overhaul.

Banking employs over a million people in Britain. It generates over 10 per cent of our annual tax revenue. It is a vital industry that could lead us back to economic recovery, but this will not happen on the back of fraudulent and corrupt practices. Rather we need to re-establish banks as calm, measured and instinctively cautious guardians of the trust and confidence account holders place in them.

Above all, we need to go back to first principles. Retail banking must be made genuinely competitive. The best way to shake the banks out of their complacency is to allow new entrants to enter the market, bringing with them the high standards of service (including IT that works...) which customers believe they should be able to take for granted.

One significant step in that direction would be taking the opportunity of selling off the now state-owned banks – in smaller 'parcels'. This would instantly create potential new challenger banks in Britain. It is something I urge the government to reconsider.

I also believe that, in view of the events of recent weeks, George Osborne should re-visit his response to the proposals of the Independent Commission on Banking. The Chancellor needs to move further and faster.

A top priority should be introducing instantly portable bank accounts. We take this for granted with our mobile phones. Why should our bank accounts be any different? This is something I have been pressing for since becoming an MP. Switching instantly between banks would remove a huge barrier to entry currently constraining new, innovative banks.

No bank should be too big to fail. In the US, where there is fierce bank competition, failures can take place without the need for taxpayer intervention. Account portability could help significantly in resolving a failed bank.

The issue of a complete separation of retail and investment banking should also return to the agenda.

It is right that the government should be the ultimate guarantor of retail deposits – a function which, incidentally, would also be considerably less risky with instantly portable accounts. But that guarantee should not extend to high-risk transactions. If an investment bank goes under, the losses should be borne by those who were happy to take the profits in better times, something the government is already committed to.

In terms of regulation, we need to ensure two things. First, regulators must be given a specific objective to reduce barriers to entry and promote competition. Second, they must have real 'teeth'. Investment banking was traditionally governed by 'fear and greed'. In recent years, implicit taxpayer guarantees have left "greed" free to expand, with no downside risk. Huge fines, better disclosure, real accountability at the top of banks, and criminal proceedings for criminal acts will be the way to enforce competence and honesty, without the need to create a new unwieldy oversight of every single banking activity.

Bankers need to acknowledge their failings. Attention can then turn to the important job of restoring their credibility – and the culture I recall from the start of my City career.

Picture shows former Barclays Chief Executive Bob Diamond before the Treasury Select Committee

View comments

Post a comment

You should be able to switch your bank account at the touch of a button

Earlier this week I attended the launch of Virgin Money, which has bought Northern Rock from the taxpayer. Its current accounts will go live next year and it targets doubling the number of current account customers within 5 years. This is a thoroughly welcome development. High street banking is a sector that has long seen a major lack of competition – four banks enjoy more than 70 per cent share of the market - so it is hardly surprising that it has seen such complacency and incompetence in recent years.

Virgin has been criticised for proposing customers should pay £60 for a current account. But I say good on them! The concept of "free banking while in credit" is a massive con that certainly doesn't mean free banking at all. In fact what happens is that banks keep the interest on our credit balances (where we have them) and charge often usurious fees to those who go overdrawn. So the poorer are subsidizing the wealthier bank account holders, but in truth, none of us are getting free banking.

Greater transparency in the relationship between banks and their customers is a key element needed in bank reform. One of the reasons we rarely switch from one bank to another is because it's impossible to tell the difference between them – even now our bank statements don't record the true cost of our banking services, so we can't choose one tariff over another. Such practice would be unthinkable in say, mobile phone contracts. And there's another lesson we could learn from the mobile phone industry. Some years ago mobile providers were forced, to their great protest, to allow telephone number portability to their customers. At a stroke this meant we could switch from one provider to another, taking our phone numbers with us.Well, the Vickers Commission has called for a free "current account redirection service" that would enable people to switch banks within seven days, meaning a faster process, but still with all the hassle of having to change bank account number, credit cards, online payments etc. I think the government should be more ambitious than this. The banks should be required to develop a shared infrastructure for bank accounts that would mean switching your bank would be at the touch of a button, and you could keep your account number and all payments if you chose to do so.

Such a single clearing system could be owned by the Bank of England, and a series of "unique identifiers": could be all that's needed to show where your account is held. Not only would this be great for consumer choice, but it would also massively reduce the current barriers to entry for new challenger banks who would have direct access to the system. It would also make a run on a bank far less likely, because the Bank of England could easily facilitate the transfer of accounts from a failed bank to a solvent one.

Banking has been a noble profession - without it we would all live in poverty. At its best it generates business growth, cuts the cost of living for each of us and enables us to live in our own homes and save for our future. It is crucial, however, that the industry is overhauled and improved. More competition from the likes of Virgin and other new entrants will, I hope, play its part in ushering in a new and brighter age for banking. Government should also play its part too by breaking down the comfortable oligopoly that currently exists.

View comments

Post a comment