Government to water down bank reform plans

Chancellor refuses to order full separation of retail and investment operations

George Osborne is set to water down a key requirement of the Vickers Commission on banking reform, which called for lenders' high street banking arms to be "ring-fenced" from their casino investment operations.

In a White Paper on Thursday, which will commit the Government to introducing such a ring-fence, the Treasury will also outline plans to allow retail operations to continue to sell derivatives to small businesses.

Derivatives are financial instruments designed to allow companies to "hedge" against unexpected fluctuations in interest rates or exchange rates which could hit their revenues. The move is likely to be controversial because the Vickers Commission recommended last September that all ring-fenced banks should be prohibited from selling potentially risky financial products such as derivatives to customers.

The exemption will be doubly contentious because hundreds of small businesses have accused high-street banks of mis-selling complex derivatives in recent years. London & Westcountry Estates, an operator of 28 business parks in Devon and Cornwall, claims it collapsed in March this year because of an interest-rate derivative it was sold by the Royal Bank of Scotland in 2008. The Financial Services Authority is conducting an investigation.

However, British banks have lobbied for the sale of derivatives to be permitted to continue inside the ring-fence. And the Treasury is understood to have been persuaded the sale of derivatives provides a basic hedging service to customers, rather than a means for banks to engage in financial speculation.

Yet the concession will stoke concerns that the Chancellor has been unduly influenced by the financial services lobby over the implementation of Vickers. The Independent revealed last December that bank executives had been in contact with senior Treasury ministers nine times in the fortnight after the Vickers report was published.

Sir John Vickers himself, who chaired the Independent Commission on Banking, has warned ministers not to give in to financial-sector lobbying. He told a joint committee of both houses of Parliament in October: "One sees evidence of lobbying activity in a variety of jurisdictions on these fronts and I think it's very important there is strong resistance. It is for Government and Parliament to resist emasculation or watering down."

The Vickers ring-fence will require the UK's largest banks to hold more capital against their deposit-taking retail banking operations and also to make it simple for these arms to be separated off from the parent organisation in the event of a crisis. The objective is to prevent banks using the savings of ordinary customers to make risky bets in the global capital markets.

The report also recommended that all banks be required to hold a significantly larger capital buffer to decrease the likelihood of them requiring a bailout by taxpayers.

However, the report also said the banks should have until 2019 to introduce these reforms and raise more capital. Robert Jenkins, a member of the UK's new financial regulator, the Financial Policy Committee, has warned that this timetable is too relaxed and "will allow lobbyists to chip away until the proposal becomes both unrecognisable and ineffective".

Start your day with The Independent, sign up for daily news emails
  • Get to the point
2015 General Election
May2015

Poll of Polls

Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs General

Recruitment Genius: HGV Fitter - Technician

£16 per hour: Recruitment Genius: This is a fantastic opportunity for someone ...

Recruitment Genius: Automotive Service Advisor - Franchised Main Dealer

£18000 - £25000 per annum: Recruitment Genius: This successful, family owned m...

Ashdown Group: Account Payable Assistant - SW London

£20000 - £25000 per annum: Ashdown Group: Account Payable Assistant - SW Londo...

Recruitment Genius: Bathroom Showroom Customer Service / Sales Assistant

£14560 - £17680 per annum: Recruitment Genius: Even though their premises have...

Day In a Page

Not even the 'putrid throat' could stop the Ross Poldark swoon-fest'

Not even the 'putrid throat' could stop the Ross Poldark swoon-fest'

How a costume drama became a Sunday night staple
Miliband promises no stamp duty for first-time buyers as he pushes Tories on housing

Miliband promises no stamp duty for first-time buyers

Labour leader pushes Tories on housing
Aviation history is littered with grand failures - from the the Bristol Brabazon to Concorde - but what went wrong with the SuperJumbo?

Aviation history is littered with grand failures

But what went wrong with the SuperJumbo?
Fear of Putin, Islamists and immigration is giving rise to a new generation of Soviet-style 'iron curtains' right across Europe

Fortress Europe?

Fear of Putin, Islamists and immigration is giving rise to a new generation of 'iron curtains'
Never mind what you're wearing, it's what you're reclining on

Never mind what you're wearing

It's what you're reclining on that matters
General Election 2015: Chuka Umunna on the benefits of immigration, humility – and his leader Ed Miliband

Chuka Umunna: A virus of racism runs through Ukip

The shadow business secretary on the benefits of immigration, humility – and his leader Ed Miliband
Yemen crisis: This exotic war will soon become Europe's problem

Yemen's exotic war will soon affect Europe

Terrorism and boatloads of desperate migrants will be the outcome of the Saudi air campaign, says Patrick Cockburn
Marginal Streets project aims to document voters in the run-up to the General Election

Marginal Streets project documents voters

Independent photographers Joseph Fox and Orlando Gili are uploading two portraits of constituents to their website for each day of the campaign
Game of Thrones: Visit the real-life kingdom of Westeros to see where violent history ends and telly tourism begins

The real-life kingdom of Westeros

Is there something a little uncomfortable about Game of Thrones shooting in Northern Ireland?
How to survive a social-media mauling, by the tough women of Twitter

How to survive a Twitter mauling

Mary Beard, Caroline Criado-Perez, Louise Mensch, Bunny La Roche and Courtney Barrasford reveal how to trounce the trolls
Gallipoli centenary: At dawn, the young remember the young who perished in one of the First World War's bloodiest battles

At dawn, the young remember the young

A century ago, soldiers of the Empire – many no more than boys – spilt on to Gallipoli’s beaches. On this 100th Anzac Day, there are personal, poetic tributes to their sacrifice
Dissent is slowly building against the billions spent on presidential campaigns – even among politicians themselves

Follow the money as never before

Dissent is slowly building against the billions spent on presidential campaigns – even among politicians themselves, reports Rupert Cornwell
Samuel West interview: The actor and director on austerity, unionisation, and not mentioning his famous parents

Samuel West interview

The actor and director on austerity, unionisation, and not mentioning his famous parents
General Election 2015: Imagine if the leading political parties were fashion labels

Imagine if the leading political parties were fashion labels

Fashion editor, Alexander Fury, on what the leaders' appearances tell us about them
Phumzile Mlambo-Ngcuka: Home can be the unsafest place for women

Phumzile Mlambo-Ngcuka: Home can be the unsafest place for women

The architect of the HeForShe movement and head of UN Women on the world's failure to combat domestic violence