First Report of Session 2012-13, Report, Together with Formal Minutes

This report contains the Commission's consideration of the Government's draft Financial Services (Banking Reform) Bill and associated proposals which give effect to the recommendations of the Independent Commission on Banking (ICB). The Commission was asked to look at one of the main proposals for increasing financial stability - ring-fencing. The Commission welcomes the creation of a ring-fence. It can, in principle, contribute to the Government's objectives of making the banking system more secure. It is essential that banks are restructured in a way that allows them to fail, whether inside or outside the ring-fence. Ring-fencing can also help address the damage done to culture and standards in banking. But the proposals, as they stand, fall well short of what is required. Over time, the ring-fence will be tested and challenged by the banks. Additional powers are essential to provide adequate incentives for the banks to comply not just with the rules of the ring-fence, but also with their spirit - what the Commission recommends as 'electrification'. The legislation needs to set out a reserve power for separation; the regulator needs to know he can use it.In this report the Commission puts forward detailed proposals to strengthen the Bill. Furthermore, there is a need for periodic reviews of the sector to reassure us that the ring-fence as a whole is working. Tougher measures may yet be required