UK banking reform aims to provide security for savers

Measures to give savers extra security if a bank fails will be announced by the British government today as part of major reforms for Britain's banking system.

Measures to give savers extra security if a bank fails will be announced by the British government today as part of major reforms for the UK banking system.

British Chancellor George Osborne will unveil his long-awaited banking White Paper, which follows last year's recommendations by the Independent Commission on Banking (ICB), led by John Vickers, on how to make the sector safer and give greater protection to depositors.

But he is considering an important concession to banks angered by ICB proposals to ring-fence depositor cash from riskier operations and investment banking.

In his annual Mansion House speech, Mr Osborne will say: "We've got to stop problems here in the City of London spilling onto our high streets and putting taxpayers' money at risk."

The Chancellor will press ahead with the ICB's more contentious proposals that will see individual depositors ranked above bondholders and corporate creditors when it comes to recovering cash owed after a bank failure.

The Uk government is planning to broaden the range of activities allowed within ring-fenced businesses. This will include simple hedging tools, such as those to protect consumers from interest rate and currency fluctuations, as well as loans to small businesses.

The move is likely to be welcomed by banks, which have lobbied hard for a wider scope of allowed activities.

Mr Osborne will add: "High-street banking will be ring-fenced so that taxpayers are better protected when things go wrong. We will be able to bail in creditors when a bank fails rather than turning to the public purse.

"And I believe that we have found a workable way to solve what I called the 'British dilemma' - so we are proposing to protect taxpayers in a way that does not make the UK uncompetitive as a home of global banks."

But the British government is not shying away from key plans put forward by the Vickers commission to give savers preference.

The banking sector has argued it would push up the cost of business loans and mortgages, as bondholders could demand banks pay higher interest rates to offset the greater risk they face on bank investments.

The British Bankers' Association argues that the depositor guarantee scheme - under which £85,000 of deposits per person is insured - is adequate to offer consumer protection.

Angela Knight, chief executive of the British Bankers' Association, warned the reforms could hurt the banking sector and have a knock on effect on the wider UK economy.

In a speech at a City and Financial conference, Ms Knight said: "A growing economy requires a vibrant banking sector to finance it."

She added: "This is not special pleading on behalf of the industry, it is special pleading on behalf of the country."

The plans will remain open for further consultation before draft legislation due in the autumn, with plans for the final legislation to be in place by the 2015 election, which will allow the reforms to be enacted.

Some changes to the system are already being phased in, with a final deadline for all reforms to be in place by 2019.

The white paper comes after the ICB published its final report last September after being appointed to look at reforms in June 2010.

Alongside the ring-fencing and depositor protection recommendations, the ICB also proposed that banks should set aside more capital to cushion them from potential future banking crises.

This is paving the way for new rules requiring banks to hold equity capital of 10% - some three percentage points higher than the level proposed in the international Basel III agreement.

The ICB also wanted bank account switching to be made easier to improve competition in the sector.

The British Chambers of Commerce (BCC) made a plea that switching remains high up on the agenda.

BCC director general John Longworth said: "While the difficult relationship between businesses and banks won't be fixed overnight, progress relies on reforms that will support enterprise and growth.

"Businesses need the ability to switch easily between banks, access to clear and transparent products and more choice between providers."

Richard Lloyd, executive director of consumer group Which?, said: "The Banking Reform White Paper and plans to ring-fence high street banking from riskier investment banking should be a major step towards restoring consumer confidence and transforming the culture of banking.

"We want the White Paper to set out a clear and urgent timetable for reform, which must not be derailed by vested interests. Consumers should never again have to foot the bill for a banking bailout that last time cost every man, woman and child £2,000 (€2,483).

"We would welcome a move toward depositor preference, which will rank individual savers above bondholders and corporate creditors when it comes to recovering cash owed after a bank failure.

"The Government also must ensure that the competition recommendations of the Vickers Report are fully enacted and seize this opportunity to increase competition and choice on the high street. Without decisive action, consumers will continue to pay the price for a lack of competition.

"Banks need to be incentivised to compete and provide better value products and customer service. The development of portable bank account numbers is one way to make it easier for people to switch bank accounts, and force banks to genuinely compete for customers."

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