Later this year we could see an end to the British banking system as we know it. Here's what's likely to change and how it could affect your finances
If proposals set out by the Independent Commission on Banking (ICB) this week are given Government approval, everything from the way that banks are structured to how easy it is for you to switch current account could be in line for an overhaul.
The good news for you is that any change that takes place will be designed to make the banking system safer, more secure and more competitive for its customers.
After the UK economy was almost brought to its knees by the near-collapse of several of the big British banks at the height of the financial crisis, this has to be a good thing.
Published on Monday, the ICB's Interim Report set out their plans for a new, safer banking system that limits risk to customers' money and liability to the tax-payer if a bank fails. Their proposed reforms also prevent monopolisation of the British banking system by a single provider and aim to make basic banking procedures more customer-friendly.
Here are the key changes:
- Retail banking (the parts that deal with customer mortgages, savings & current accounts) should be kept separate from riskier investment banking.
The ICB haven't gone as far as suggesting banks should be broken up, but instead that the retail arm of a bank should sit under a separate subsidiary to the investment arm. This will help to protect tax-payers from the repercussions of any bad investments. - For every £100 retail banks lend, they should set £10 aside as a safety buffer. This will help them cope with any losses and minimise the risk of failure.
- Banks should make a 'worst case scenario' plan that allows their retail arm to continue offering banking services to customers if the investment arm got in to financial difficulty and collapsed.
- There should be a limit on the extent to which the retail arm of a bank could bail out the investment arm if it got into financial difficulty.
- Lloyds Banking Group (made up of Lloyds TSB and HBOS subsidiaries) should be made to sell more branches so it is responsible for a lesser percentage of UK financial products - at the moment they provide over 30% of UK bank accounts.
- It should be made easier for customers to switch bank accounts.
- Portable account numbers should be introduced so that you don't need to change direct debits and standing orders when you switch.
- A 7 day transfer period should be enforced to speed things up when you move your banking from one current account provider to another.
- Eligibility criteria for financial products should be made more flexible.
The proposals are now subject to a period of consultation. This comes to a close in September when the ICB will officially present their suggestions for banking reform to the Government for consideration.
It will then be down to the Government to weigh the benefits to tax-payers against the risk that the extra rules and regulations will drive the big banks off of British shores to countries with more lax legislation.
However, given that it was the Chancellor that instigated the ICB's investigation it's likely that weight will be given to their recommendations and that much of the above will be implimented.
How the banks will react remains to be seen.
