October / November 2011
News roundup

Vickers report: the recommendations

As has been widely reported, the final recommendations of the Independent Commission on Banking’s (ICB) report were released on 12 September. Here, we provide a summary of the key points:

Ring-fenced banking

Fears that the Commission would demand a strict division or even complete separation of retail and investment arms proved to be unfounded. UK retail activities will be carried out in separate subsidiaries which would be legally, economically and operationally separate from the rest of the banking groups to which they belonged.

The ICB describes three types of services – mandated, prohibited and ancillary – when trying to separate what activities would occur inside and outside the ring fence.

The flexible arrangements were constructed to allow for the different requirements of leading UK banks.

Keep 17-20% of assets as “loss-absorbers”

The ICB recommends that the retail and other activities of large UK banking groups should have primary loss-absorbing capacity of at least 17-20 per cent made up of highest-quality assets topped up with bonds that can be easily converted to equity.

The equity capital requirement for retail banks is 10 per cent which goes a lot further than the Basel Commission which only calls for a 7 per cent target.

Lloyds branch sale

The report backed away from forcing further branch sales on Lloyds Banking Group. The ICB had previously indicated that it would compel the bank to sell more than the 632 outlets currently on the market in order to meet EU state aid requirements.

The final report made no such claims, in what is being seen as a victory for the bank. The focus has instead shifted towards encouraging competition in the market.

New system to enable current account switching

The ICB wants the process of switching current accounts to be made simpler. It has called for the implementation of a free redirection service by 2013 along with improvements to the system to catch all credits and debits going to a customer’s old, closed account. This will include automated payments on debit cards and direct debits.

2019 deadline

Implementation of the reforms should begin as soon as possible and be completed by the Basel III date of the start of 2019. This offers a longer time period that many commentators had expected.

RBS and NatWest ban use of rival ATMs

Almost one million Royal Bank of Scotland and NatWest customers have been barred from using rival cash machines as the bank receives a fee every time they do so.

Customers with basic accounts, who do not have access to an overdraft or cheque book, will only be able to access their money at RBS, NatWest, Tesco or Morrisons cash machines or over the counter at the Post Office.

A bank spokesperson said the previous model, whereby RBS and NatWest was charged for offering free access to rival ATMs, was “unsustainable”. However, consumer groups have described the move, which will be implemented with immediate effect, as a “kick in the teeth” – highlighting the disproportionate effect on rural areas.

Other banks such as Santander and HSBC already have restrictions on counter withdrawals at their branches.

Northern Rock plays down expectations

The Chairman of Northern Rock has moved to dampen expectations relating to the price tag for the troubled bank.

Speculation in the City had set £1.4bn as the benchmark for any bid but Ron Sandler does not hold that view. However, he said he was still confident that the taxpayer would be “well rewarded” for bailing out the bank.

The deadline for bids for Northern Rock passed in late July though Sandler refused to identify the potential buyers and said there was no timetable to complete a deal. Meanwhile shareholders in Northern Rock have lost the latest round of their battle to receive higher compensation from the government. The group, which includes hedge funds SRM Global and RAB Capital, claims the government undervalued the bank at the time of nationalisation. An appeal against a High Court decision not to permit a judicial review was unsuccessful.

Growth worries will continue says KPMG

A KPMG report into the UK banking system predicts uncertainty and worries about growth.

The publication, which analyses the interim reports of leading UK banks, said the next six months will remain challenging with uncertainty over future growth streams and additional costs from regulation.

Cost control was also highlighted as a key priority as top line revenues stubbornly refuse to grow across many business areas.

David Sayer, global head of retail banking at KPMG, said: “With future growth becoming increasingly difficult to source, bank executives have been forced to step up their focus on cutting costs wherever possible in a bid to make their businesses more profitable. If growth does not return, further cost cutting seems inevitable.”

For retail banks, the issue of ongoing Payment Protection Insurance compensation claims remains a huge problem.

Financing the “Facebook Generation”

A new report from a credit rating agency offers telling insights into banking services in the social media world.

The Experian publication Banking on the Facebook Generation outlines how techsavvy 18-25 year-olds have taken social media and its ideologies into adulthood, influencing how they deal with financial services companies.

Tor Bengtsson, Commercial Director at Experian UK & Ireland, said the report highlighted “fundamentally different expectations around how... [the Facebook Generation] should be served by banks and other financial services providers”.

Mr Bengtsson said this group wanted “immediate information, instant decisions, faultless customer service and the ability to manage finances on the move. Providers that fail to tick all these boxes could fall behind.”

Co-operative asks savers to invest in overseas ventures

The Co-operative Group has announced its support for an innovative microfinance initiative.

The website, www.lendwithcare.org, gives people the option of investing their money in an entrepreneur in the developing world. Savers are being encouraged to lend the money rather than see it sit in a bank account offering historically low interest rates.

The Co-operative will promote the website to its six million members and 110,000 staff via leaflets, magazines and its own website. So far, around 4,400 loans totalling £155,000 have been made, and a target has now been set of hitting £1.5m by the end of 2012.

One person who signed up to the scheme said: “In the current economic environment, lending money to a bank – which is effectively what a savings account does – makes little sense. This way, our money feels like it is going much further.”

MP wants sovereign debt transparency

The Chairman of the House of Commons Treasury Select Committee has called on banks to reveal their exposure to sovereign debt. Conservative MP Andrew Tyrie has said he intends to speak to the Bank of England to see if there is a way to impose a regulatory compulsion.

Global markets have been in turmoil recently due to worries about the national debts of many countries.

Tyrie believes that an agreement should be reached with regulators which would lead to major banks disclosing not just sovereign debt but other data which may pose a risk to the system while not hurting themselves competitively.

MPs accuse Payments Council

MPs have accused the Payments Council of protecting its members – the banks – more than customers.

The charge comes in the wake of the now rescinded plan by the Council to scrap cheques in 2018. The original decision on cheques triggered public concern and the Council announced a reversal of its policy in July.

A report by the Treasury Select Committee says the announcement on abolition, which was made in December 2009, was “unnecessary” and “unacceptable”.

In response, Gary Hocking, Acting Chief Executive of the Payments Council, says: “As part of an existing commitment to the OFT we are due to review our governance arrangements before the end of the year. We will take the Select Committee’s recommendations, particularly on the role of our independent directors, into account.”

HSBC sells US interests

HSBC has sold its US credit card business to Capital One.

The deal marked the second major sale of US assets which the UK bank made in a matter of weeks. It also offloaded 195 US retail branches to First Niagara Bank. The branch network (mostly in upstate New York) fetched $1bn.

Capital One paid around $2.6bn for the credit card business which includes a $30bn portfolio plus numerous other benefits, including partnerships and infrastructure. Capital One’s chairman and chief executive, Richard D. Fairbank, said he was “very excited to work with our new retail and co-branded partners, as well as the HSBC associates who are joining Capital One”.

CORRECTION

In the last issue of Chartered Banker, our edited version of David Pearson’s article about the proposed abolition of cheques may inadvertently have given a misleading impression of the duties of banks.

David explains – “I wrote: ‘Much of the contractual relationship between banks and their customers is implied, some is written whilst some arises through precedent, custom and use. The most famous and pertinent case is probably Joachimson v Swiss Bank Corporation (1921). Here, Lord Justice Atkins clearly laid out the duties of a bank as they relate to written orders from customers.’

“He said that a bank is required ‘to receive money from and to collect bills for a customer. A cheque is simply a bill of exchange drawn on a banker (Bills of Exchange Act 1882, s73), that is, a written order to him to pay the drawer or another named person or to order’. The case actually refers to written orders, which presumably is anything in writing especially given the content of the Bills of Exchange Act (1882).

“The Joachimson case,” David continues, “did not lay down that a cheque is a bill of exchange drawn on a bank, as the edited article implies.”

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