Former members of the Parliamentary Commission on Banking Standards (PCBS) have today (17 November) published a Statement on the progress made towards the recommendations in its five reports over 2012/13. The Statement has been signed by: Andrew Tyrie MP, former Chairman of the PCBS; Mark Garnier MP; Andrew Love MP; John Thurso MP; Justin Welby, the Archbishop of Canterbury; Lord Lawson; Lord McFall; and Lord Turnbull. Baroness Kramer and Pat McFadden both attended the deliberative meeting, but cannot add their names because they now have front bench duties.
Commenting on the Statement, the former Chairman of the Parliamentary Commission on Banking Standards, Andrew Tyrie MP, said:
“In its final Report, the Parliamentary Commission on Banking Standards recommended a wide range of reforms to the banking sector. These reforms are badly needed to tackle serious lapses in banking standards and a collapse of trust in the industry. The Forex scandal has exposed how much work there is still to do.
“The Commission’s wide-ranging recommendations—on the structure of banking, individual responsibility, regulation, corporate governance, remuneration, competition and enforcement—offer a much better prospect of protection for both the taxpayer in a subsequent crisis, whenever that may come, and for consumers against future bank misconduct. But they need to be fully implemented. They certainly must not be diluted.
“Ring-fencing may be particularly vulnerable to dilution from bank lobbying, particularly as memories of the crisis fade and given that full implementation is half a decade away. Dilution cannot be permitted. The UK cannot afford to go through the next business cycle without, as a minimum, the protection of an effective and electrified ring fence. Banks should know that the Commissioners remain unwavering in support of the ring-fence, and the regulators’ full implementation of it. Any attempts to game the rules once in place should be met with strong action by the regulators. The Commission’s proposals—now embodied in statute—empower the regulators to restructure or split up any banking group that seeks to game the ring-fence. It is crucial that the statutory review—secured only after pressure from former Commissioners—assesses whether the ring-fence remains effective, or whether full separation is required.
“Regulators need to target the reforms on what really matters. To do this, they should have in mind that regulation needs to focus on those who can do serious harm to a firm, its customers, or markets. The appalling misconduct in the Forex market revealed last week illustrates the importance of this. Traders involved in that misconduct must be included in the new Certification regime, and also subject to much closer scrutiny by banks. It is also crucial that traders and other staff that can cause serious harm have ‘skin in the game’ for longer—parts of their performance-based pay should be deferred for a long period, and capable of cancellation when serious misconduct emerges. Deferral of variable remuneration is essential for the alignment of incentives, to address the lag—inherent in parts of banking—between taking a decision and finding out its full consequences. It is crucial that the reward should be more closely aligned to the maturity of the risk. The fact that, several years after the LIBOR scandal broke, the Forex market may have been similarly exposed to rigging is extremely concerning. The PCBS made wide-ranging proposals to deter such behaviour but banks and regulators do not yet appear to be fully implementing them.
“As time passes, the pressure for reform will weaken. The old system failed disastrously—the Forex settlement is a stark reminder of this. Maintaining or resuscitating parts of the failed system, whether at the behest of bank lobbying or for the convenience of regulators, must not be permitted to happen.
“The UK can be a global leader in standards reform, and UK legislation has provided a framework for the raising of standards in banking. If correctly implemented, trust in financial services can be restored, with immense benefits for consumers and for the UK’s competitiveness. Progress has been made since the Commission was established over two years ago, but there is much still to do.
“Detailed implementation of the reforms will determine their success. The former Commissioners have considered a number of the regulators’ proposals in turn, and made detailed recommendations on each in the statement published today.”