From the Co-operative Bank “bail-in” and the privatisation of Lloyds to the Parliamentary Commission on Banking Standards report and lenders being told to raise capital, it’s been a lively few days.
But while the commission’s proposal to jail reckless bankers proved popular, there are fears that the report and the actions of the Prudential Regulatory Authority (PRA) – which identified a £27.1 billion capital black hole in UK banks – may have implications for consumers.
Here we digest some of the initial indications as to what the latest developments in the banking industry could mean for ordinary bank customers.
SAVINGS AND CURRENT ACCOUNTS
The Parliamentary Commission on Banking’s 57-page report, Changing Banking For Good, stole the headlines for proposing criminal sanctions for irresponsible senior bankers. Other proposals would, if adopted, have a greater impact on individuals, however.
For example, it called for the Treasury to look more closely at account portability, allowing people to take their account numbers and sort codes with them when they switch banks. The Office of Fair Trading also believes portability could boost current account competition and it may well be considered more seriously if the launch of a seven-day switching service in September proves ineffective.
The report also zeroed in on peer-to-peer (P2P) lending services. These are the websites that enable people to lend to other individuals and businesses in return for a higher rate of interest than available on conventional savings accounts. The commission believes the P2P market is a viable alternative to mainstream banks and wants access to them made easier. It also urged the Treasury to look at the tax incentives open to P2P lenders such as RateSetter and Zopa, with an eye on a more level playing field between high street banks and alternative providers.
David Black, banking specialist at Consumer Intelligence, said: “The P2P platforms offer a real alternative to the established banks. While there are additional factors to be taken into account they offer significantly higher rates to savers than are available from bank and building society savings accounts.”
More broadly the commission’s proposals are aimed at improving trust in high street banks by making them more reliable and trustworthy, with less short-termism and hard-selling.
Patrick Connolly, head of communications at AWD Chase de Vere, said: “Following their previous failings it is entirely right that banks are put under close scrutiny and the proposals outlined should give customers more confidence in the ongoing stability of their banks and the banking sector as a whole.”
But William Hunter, director of Hunter Wealth Management in Edinburgh, pictured below left, warned that the cost of the recommendations would include higher fees and reduced interest rates.
“Savers will find it hard to get a return that matches inflation. If you turn the screw on the bankers they simply pass it onto the savers,” he said.
This week’s developments contain mixed news for investors, according to Connolly. “On the one hand ensuring that banks adopt sustainable practices is positive; on the other greater regulation could impede growth and impact on profitability,” he said.
The suggestion of heftier punishments for irresponsible bankers and the power for bonuses to be deferred and, where necessary, cancelled, may not be as attractive as it first sounds, claimed Hunter. While the measures are aimed at making banks more sensible and less short-term in their outlook, Hunter believes they may also inhibit productive risk-taking.
“As a shareholder you invest to get a return in the knowledge that the directors will try to maximise both share prices and dividend. In the future this would not be the case for banks, so why be a shareholder?
“All this level of regulation and criminalisation would do is increase cost for a very marginal increase in security,” he said.
The PRA’s order for a number of major UK banks to plug multi-billion pound capital shortfalls set nerves on edge among investors. But investors with exposure to UK banks through shares and funds have nothing to worry about, according to Connolly.
“While some major capital shortfalls have been identified other banks were given a clean bill of health,” he noted.
“People should be encouraged that we are now seeing greater transparency in the banking system.”
First-time buyers could be the chief victims of the PRA’s capital raising order. The providers with the biggest shortfalls are Lloyds, Royal Bank of Scotland, Barclays and Nationwide Building Society, among the biggest mortgage lenders in the UK.
Lending has risen in recent months, a reflection partly of the cheaper finance made available to banks and building societies through the funding for lending scheme (FLS), launched last August.
But after being urged to lend more to individuals and businesses the banks and building societies singled out by the PRA are likely to pull back once more as they focus on shoring up their capital buffers.
Experts believe first-time buyers are likely to lose out most, as banks have to set aside more capital to lend to those with smaller deposits.
Hunter claims the Parliamentary Commission’s proposals could also hinder the mortgage market.
‘The level of equity and the level of life and indemnity insurance required by banks would soar,” he claimed. “We’d have higher upfront charges, increased interest rates and compulsory life insurance cover, although on the plus side you will be able to repay a mortgage quicker.”