BANKING REFORM

What banking reform What banking reform

What banking reform will mean for you

BY RUTH JACKSON BY

After a long wait, the Independent Commission on Banking (ICB) has finally released its recommendations for banking reform. The changes put forward in the report are intended to prevent a repeat of the 2008 banking collapse. But what will they mean for you?

The bulk of the report is dedicated to the plan to ring-fence retail banking from 2019. This would separate consumer banking, such as savings accounts and mortgages, from riskier investment banking in order to protect ordinary people with money in the bank.

The hope is that this will reduce the chance of a bank collapsing, and that if an investment bank does go bust it won’t take its retail division with it.

The problem is that ring-fencing is expected to cost the banks up to £7 billion. How that cost will be met is a source of concern. There is a chance that in order to recoup the costs banks will start charging for bank accounts. But Sir John Vickers, who led the banking investigation, states that it will be the investment arms of the banks that will bear the brunt of the cost of ring-fencing.

The report has also recommended that competition between high street banks should be improved. At present, 77% of all personal current accounts are held with the big four banks, according to the report. In order to improve competition the ICB is calling for an ‘account redirection’ service to be introduced by 2013.

This service would make it easier for customers to switch bank accounts, as they could arrange for a year’s redirection of direct debits and standing orders. This would work much like a postal redirection does, so that any attempts to take a direct debit from an old account would automatically be forwarded to the new account. Under the new proposals, the transfer of an account should also take place within seven working days.

The final impact of the report on consumers comes from the ICB’s call for banks to hold more cash to cover any unexpected issues in the future. In order to increase the amount of cash they have in reserve, in a worst-case scenario the banks may call in some loans, but if this were to occur it would be unlikely to affect people with small personal loans. It’s more likely that banks will reduce their lending overall and be a lot more choosey about whom they lend to.

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OCTOBER 2011 | MONEYWISE 9