MPs: Ring-fence falls ‘well short of what is required’
The proposed separation of retail and investment banking activities in the draft Financial Services Bill fall “well short of what is required” and need to be strengthened to discourage banks from “gaming” the rules, MPs have warned.
In its first published report examining the proposals in the Bill, the Parliamentary Commission on Banking Standards warned that both banks and politicians could be tempted to tear holes in the legislation over time.
Andrew Tyrie, chairman of the Parliamentary Commission on Banking Standards, said: “It is essential that banks are restructured in a way that allows them to fail, whether inside or outside the ring-fence. Ring-fencing can also help address the damage done to culture and standards in banking.
“But the proposals, as they stand, fall well short of what is required. Over time, the ring-fence will be tested and challenged by the banks. Politicians, too, could succumb to lobbying from banks and others, adding to pressure to put holes in the ring-fence.
“For the ring-fence to succeed, banks need to be discouraged from gaming the rules. All history tells us they will do this unless incentivised not to.”
Mr Tyrie recommends “electrifying” the ring-fence to prevent this from happening.
Among their criticisms of the draft Bill, MPs argued that it is important the ring-fence functions are protected rather than the banks or their shareholders and creditors.
They also called for additional rules to ensure banks agree not only with the letter of the law, but with its spirit.
The report said: “There should be no government guarantee of ring-fenced banks, nor perception of one.”
Mr Tyrie warned that the ring-fence could be vulnerable to erosion over time: “Pressure will come from many quarters. It is all too easy, and sometimes all too convenient, to forget the lessons of the past. This cannot be allowed to happen.”