Customers could pick up tab for overhaul of British banking system

CUSTOMERS could be hit with charges for retail banking services as financial institutions struggle to recoup costly reforms aimed at a major overhaul of the industry, experts have warned.

Consumer groups warned that banks could introduce fees for accounts and potentially shun ordinary customers to focus their attention on high-value individuals as a result of the long-awaited reforms proposed by the Independent Commission on Banking (ICB).

Neither Bank of Scotland nor Royal Bank of Scotland could rule out such charges being implemented as a result of the review which could cost the four major UK banks between £4 billion to £7bn a year to put in place.

The tougher-than-expected ICB report, led by Sir John Vickers, proposed that retail banks should be ring-fenced from the more risky investment banking divisions in a bid to avoid tax payers from footing the bill in case of a second crisis in the finance industry.

Sir John, whose report was welcomed in parliament yesterday by Chancellor George Osborne, said the commission’s recommendations would ensure banks were more self-reliant so the taxpayer “gets right off the hook” in the case of a failing bank. Billions of pounds of taxpayer money was poured into the UK banking sector during the recession.

The new regime would also allow people and businesses wanting to change banks to do so within seven days in a bid to boost competition in the market.

The report claimed that the sweeping reforms, which should be in place within eight years, would take the burden of a failing bank away from the taxpayer – and put the onus on to creditors of the institutions instead.

Under the proposals, the different arms of banks would have to be run separately, with independent boards and set up as separate legal entities.

The majority of British retail banks would be affected by the move, including Scottish institutions such as Royal Bank of Scotland and Lloyds Banking Group, which owns Bank of Scotland.

Competition was reduced in the banking sector during the credit crunch due to mergers, including that of Lloyds and HBOS.

“One of the key benefits of separation is that it would make it easier for the authorities to require creditors of failing retail banks, failing wholesale/investment banks, or both, if necessary, to bear losses, instead of the taxpayer.”

The report, which sent banking stocks tumbling in early trading yesterday, suggested that in the case of a problem, the troubled section of the bank could be split up – with some activities wound down, some sold to other market participants, and others formed into a “bridge bank” under new management – wiping out their shareholders and creditors.

“Solving the ‘too big to fail’ problem is, moreover, good for competition,” added the ICB, which was set up by the coalition government last year to conduct a full review of the sector after the financial crisis four years ago left several banks needing bail-outs.

But other consumer groups warned that the banks may begin to charge retail banking customers more in a bid to recoup the costs of the overhaul.

“Making banks ring-fence their risky investment arms will mean that if the banks get themselves into a hole again, they’ll have to get themselves out of it,” said Stefan Maryniak, personal finance expert at uSwitch.com.

“However, consumers should be aware that this move could carry some risks for them.

“If the retail arms stop making money, banks could start implementing more fees in order to save them. We could also see banks trying to attract a certain calibre of customers.

“This is great for these people, who could see increased competition for their business, but those less attractive to the banks could be left on the shelf.”

Kevin Mountford, head of banking at MoneySupermarket.com, said: “The main concern of these recommendations is the additional costs on the banking sector, which could either be passed on to customers in some shape or form, or see a number of banking operations moving their head offices away from the UK.”

Mr Osborne told parliament the report would allow banks to remain as competitive “as any in the world” – adding that he planned to stick to the report’s timetable and described the report as an “impressive piece of work”.

Shadow chancellor Ed Balls said he was “deeply sorry” for the part the last Labour government played in the regulatory failures which led to the banking crisis, and urged Mr Osborne to push ahead with legislation as quickly as possible.

But former chancellor Alistair Darling said it was an “erroneous assumption” that the government would never have to bail out a bank again. He added: “I welcome this report, but it has to be seen as part of a wider range of reforms that are necessary to make our banking system stronger and more secure than it has been in the past.”

“We must have urgent assurances that the banks and the UK government will not drag their heels over this,” added SNP Treasury spokesman Stewart Hosie.

Business groups warned that the measures could restrict banks from lending to companies, which could hamper corporate growth.