ICB report on future of banking must not be kicked into touch

For all the sensible recommendations of the Independent Commission on Banking (ICB) it is disturbingly easy to envisage the report being booted into the long grass.

Another urgent and important study, the Dilnot Commission report on long-term care in England, was kicked into the rough in July and early noises from the government suggest the ICB’s recommendations will join it.

Chancellor George Osborne has been cautious in his welcome for the report and his insistence on consulting further with interested parties means only one thing: the banks get a chance to delay the implementation of the reforms.

Their argument isn’t without merit, but nor is it strong enough to justify a delay, particularly to the overly generous timetable put forward by the ICB. The banks claim that the implementation of the main recommendation – ring-fencing high street operations from other banking activities – would pose a threat to the industry and wider UK economy at a difficult point in the cycle.

But there will always be a timing argument. Implement the reforms when a sustainable recovery is under way, and we’ll be told that changes would threaten that recovery. Wait until the sector is back on its feet and thriving again, and there will be a choice between arguing that ring-fencing would ruin all that good work, or insisting there is no need for any changes after all.

Opposition to home reports ahead of their December 2008 introduction was similar. Interested parties claimed that introducing the reports during a struggling market would be disastrous; supporters argued that a market of low activity levels was the opportune time for the system to come in.

As it happens, the banks are a long way from recovering and it will take more than the IBC report to convince some of the UK’s most experienced fund managers to invest in them.

Few managers have significant positions in the banking industry, with the likes of Royal Bank of Scotland, Lloyds Banking Group and HSBC still absent from portfolios in which they were once dominant.

And much of the reason is that little has changed despite the banking crisis. Their accounts still remain far too opaque for most managers and analysts. Leigh Himsworth of Eden Financial, who recently launched a UK Select Opportunities fund, is the latest to rule out buying shares in UK banks. He accused fund managers who do invest in banks of doing so only to avoid drifting too far from the FTSE 100 index.

Others are notably downbeat about the outlook for the banks. Colin McLean, of Edinburgh-based SVM, runs the firm’s UK growth fund alongside Margaret Lawson. He believes many people still underestimate the depth of distress in the banking sector, pointing out that while they have made progress in unwinding their balance sheets – shedding derivatives, for example – there remains a long way to go.

And that means there are still a lot of underlying risks in Lloyds and RBS especially, according to McLean, who believes that only when the economy recovers can the banks do likewise.

One implication is that far from repaying the money owed to the public purse, the government may again need to go to the aid of the banks. The most obvious threat is sovereign debt, with RBS, for example, heavily exposed to Irish and, to a lesser degree, Greek debt. McLean last invested in Lloyds and RBS early in 2010 and he sees little reason for that to change any time soon.

In that context – and McLean is far from alone in his assessment – you wonder how long it will take for the banks and the government to be comfortable with taking forward the ICB’s proposals. It will be a long, slow recovery and the chances of seeing real progress by the 2015 election are slim.

The ICB should be congratulated for producing a sober report with a eye firmly on the interest of customers, in the face of lobbying from the banks.

There will of course be ramifications for consumers of implementing the reforms, in the form of more expensive products, the end of “free banking” and increased cherrypicking, with unprofitable customers getting the short end of the stick.

But in the long term, ring-fencing will ultimately be for the benefit not only of consumers, but the banking industry and economy.

There are very good reasons behind the ICB’s proposals so the temptation to kick the report into the long grass must be resisted.