MPs demand big changes for banks

A ROOT and branch reform of the banks to provide greater protection for savers and ensure bonuses are linked to performance is among the key recommendations of a report published today.

The Future of Banking Commission, a cross-party group of MPs, warns the government that the banks cannot be allowed to go back to business as usual.

Its proposals would give individual depositors priority in the ranking of creditors in the event of bank failure.

Banks would be banned from paying commission to frontline sales staff, and bank boards rather than regulators should take primary responsibility for the stability of their banks.

In a response to criticism of the bonus culture, it says senior executives should be rewarded for long-term business performance.

The cross-party inquiry – first proposed by John McFall, former chairman of the Treasury Select Committee, in Scotland on Sunday – was launched in December by consumer group Which?

It was chaired by former shadow home secretary David Davis. Vince Cable, then Liberal Democrat shadow chancellor but now the government's business secretary, with responsibility for banking, was also on the panel.

It took evidence from consumers, regulators and bankers, including Bank of England governor Mervyn King, the retiring Financial Services Authority chief executive Hector Sants and Royal Bank of Scotland chief executive Stephen Hester.

The report is expected to have a major influence on the independent commission set up by Chancellor George Osborne last month to look into the case for breaking up the banks.

The separation of banking activities would eliminate conflicts of interest and contribute to a safer system by reducing the scale of individual banks, according to the commission.

It says: "It would require global consensus and co-ordination but the UK is one of the world's leading financial centres and we encourage the UK government to initiate global debate on this issue."

The report also calls for banks to be restructured to protect their customers and the economy in the event of failure. The first step would be the introduction of a public Living Wills system setting out how the collapse of a bank would be managed.

Commenting on the report, Davis said: "Fatal flaws in the structure, regulation and behaviour of the banks almost crippled the world economy. We have made recommendations to minimise the conflicts of interest inherent in banking, and to limit the liability of the taxpayer and thereby reduce the risk to the economy."

The British Bankers' Association said it agreed with many of the objectives. But it added: "The industry has made many significant changes to the way it operates and the far-reaching nature of regulatory change is there for all to see and cannot by any means be described as a return to 'business as usual' as the report implies."