Government backs jailing reckless bankers

City of London skyline The Parliamentary Commission was highly critical of aspects of the banking industry

The government has said it will support most of the recommendations produced by the Parliamentary Commission for Banking Standards.

Top of the list will be a new criminal offence of reckless misconduct by top bankers, with a possible jail term.

Banker bonuses are to be deferred by up to 10 years, and could be repayable if the bank has to be bailed out.

But the government did not agree to toughen limits on banks' risk-taking or to scrap its bank holding company.

In a 571-page report issued last month, the Commission had called for a much tougher "leverage ratio" for banks - a measure that limits the total amount of loans and investments a bank can make relative to the amount of capital the bank holds to absorb losses on those assets.

But Chancellor George Osborne has stuck steadfastly to the lower level internationally agreed and laid out by the Bank for International Settlements in Basel.

Mr Osborne was also called on to abolish the UK Financial Investments - the government's holding company for its stakes in Royal Bank of Scotland and Lloyds Banking Group - which the Commission described as a "fig leaf" for government intervention in the banking sector.

The commission explained

  • The Parliamentary Commission on Banking Standards was appointed in July 2012 following the Libor scandal and other episodes that damaged the reputation of banks in the UK
  • It includes MPs and peers and is chaired by Andrew Tyrie, who also heads the House of Commons' Treasury Committee
  • Members include the Archbishop of Canterbury, Justin Welby
  • It heard evidence from major figures in the banking sector

The government refused, noting that "UKFI is staffed by highly expert professionals with extensive experience in the banking sector".

However, the government did reiterate that it would consider the case for splitting Royal Bank of Scotland - currently 81%-owned by the government via UKFI - into a "good" High Street bank that could be quickly sold back to the private sector, and a "bad" bank to sit on and work out existing problematic loans.

Burden of proof

The chancellor said that he was pleased to accept the Commission's main recommendations, promising: "Where legislative changes are required, we will amend the Banking Reform Bill, which is currently before Parliament."

The Commission's report focused primarily on the problem of making bankers individually responsible for the performance of their institutions and business areas.

Among the plethora of recommendations to be adopted by the government:

  • there will be a new system for approving who can fill senior positions at UK banks, with senior bankers being given clear individual responsibilities
  • if a bank breaks any rules, the burden of proof will be on the relevant senior bankers to show that they took all reasonable steps to stop it happening
  • the time limit for regulators to bring action against miscreant bankers will be extended beyond the current three years

The government also threw its weight behind proposals to increase competition between the High Street banks.

The newly-created Prudential Regulation Authority - which sits within the Bank of England and is responsible for ensuring that excess risks do not build up within the banking system - will be given an additional role in ensuring competition among the banks.

A new "payments regulator", which has yet to be created, will be asked by the government to explore ways of making it easier for people to transfer their accounts to rival banks, and to look at whether the banks should no longer collectively control the inter-bank payments system.

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