Split retail and casino banks to cut fees, urges think-tank

A STARK split of retail and investment banking rather than mere “ring-fencing” would help cut customer fees and charges, a top think-tank claimed yesterday.

The Institute for Public Policy Research (IPPR) is the latest body to throw its weight behind moves for a more formal separation of high street and so-called casino banking than that proposed by the Vickers report.

Bank customers were paying substantial fees and charges – which the IPPR compared to unjustifiably high “rents” – because competition in the sector was “severely distorted and regulation has been historically ineffective”.

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The body, in a report out yesterday called “Don’t bank on it: financialisation in the UK economy”, said such charges failed to reflect the levels of banking service and performance, and were helping “harm the rest of the economy”.

Tony Dolphin, chief economist at IPPR, also called on the government to set up an independent commission “to focus on ways to reduce rent extraction by the financial services industry from the rest of the economy”.

The report said the Vickers’ recommendation of financial and managerial firewalls being created between retail and investment banking would cut the risk of future taxpayer bailouts of banks. But it claims it would fail to deal with the problem of customers paying excessive fees.

It urges the government to completely split retail and investment banking, instead; fuel competition in the high street by reducing barriers to entry for new banks; and reduce risk-taking in investment banking by enforcing greater transparency of fees and practices, and make senior directors and managers liable for financial loss when things go wrong.

IPPR said it was also important that “more should be done to make the case for wide-ranging financial transaction taxes and to explore ways to minimise avoidance of them”.

The Parliamentary Commission on Banking Standards, chaired by Treasury select committee chairman Andrew Tyrie, published an interim report before Christmas calling for an “electrified ring fence” between retail and investment banking.

This suggested banks could be forced by legislation to separate the activities formally if the ring fence proved inadequate.

The commission is due to publish its final report later this month. Meanwhile, Chancellor George Osborne has urged the commission not to “unpick” the Vickers report that had initially been welcomed by many MPs and accepted by Britain’s big five banks.