Banks under fire

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You are nobody in finance these days if you have not had the hottest invite in town. Current and former chief executives, chairmen and chancellors have all made their way to Parliament’s Portcullis House to give evidence to the Commission on Banking Standards.

At times jovial and intimate, at other times hostile and fractious, the Commission’s hearings have become the banking world’s answer to the Leveson Inquiry, where a mixture of famous faces, past and present, have been called to account by the assembled Lords and MPs (BSE: MPSLTD.BO - news) .

Under the inquisition led by Andrew Tyrie, the Conservative MP and Treasury Select Committee chairman, the various financiers, regulators and politicians have given their views on some of the most important reforms in the modern history of British banking. The changes ahead could put in place the most dramatic reform of the industry seen in more than two decades.

This week, the Commission will produce its first official publication as it releases its report on the Government’s Banking Bill that is set to force lenders to put in place a so-called “ring fence” effectively separating retail and investment banking operations.

At stake is whether George Osborne , the Chancellor, will receive the support he so desperately craves for his legislation amid claims from critics that it amounts to a watering down of the recommendations from Sir John Vickers’ Independent Commission on Banking.

In a particularly heated exchange last month with Pat McFadden, a Labour member of the Commission and former government minister, Osborne warned of the “consequences” of “unpicking a consensus” around his reforms.

“You gave us the job of going over the ground, and I suspect that if you were sitting on this side of the table, you would not take too kindly to a Chancellor or Government minister saying 'I want you to look at that, but I don’t want you to look at that’, and so on,” a clearly irritated McFadden told Osborne.

Osborne’s concerns are rooted in the fear of what a body that he was reluctant to assemble in the first place could recommend. A close reading of the evidence sessions of the Commission reveal three areas on which it could arrive at conclusions that if not totally at variance with the Chancellor’s carefully constructed “consensus” could at least leave him with a major headache.

Former Chancellor and Commission member, Lord Lawson, has used his questioning time to make the case for the full separation of retail deposit-taking businesses from riskier investment-banking operations.

It seems unlikely the Commission’s report will recommend anything this drastic, however it is quite probable it could suggest the Government should be given the power to force separation in future should the ring fence prove inadequate to the task of safeguarding customer deposits.

As well as this, Osborne and the Treasury have effectively delegated to the Commission the task of deciding whether derivative businesses selling both simple and complex financial products should be allowed within the ring-fenced bank or excluded from it.

That neither Sir John Vickers in his report, nor the Treasury with its considerable resources, felt able to offer a firm view on this knotty issue underlines the difficulty of the problem the Commission has been asked to solve.

Tyrie and his fellow commissioners are not short of collective expertise or detailed knowledge of the issues. However, they have made it plain taht they feel they have effectively been asked to hand the Government a “blank cheque”, given that Osborne has admitted that the legislation will be an “enabling bill” with most of the detailed changes to be made in secondary legislation in two years.

“We would like more than an assurance and we would like more than a blank sheet. We do not need every last bit of detail but we want more than we are getting now, Chancellor,” said Tyrie in a not so subtle rebuke to Osborne.

The meticulous approach is hardly surprising given one of those most engaged in the Commission’s work is Lord Turnbull, a former head of the Treasury and former head of the Civil Service, who has become one of the body’s most forensic and dogged inquisitors.

If the Commissioners can sometimes seem a little irritable and exasperated with their witnesses, it might well have something to do with the heavy workload they have been given. While this week will all be about their views on the Bank Reform Bill, it should be remembered that this was only added to the Commission’s remit by Osborne as an afterthought. Their main job is to produce a report into the “professional standards and culture of the UK banking sector” in light of the Libor-rigging scandal and to see the “lesson to be learned” on corporate governance, transparency and conflicts of interest.

Even with 10 members and a support team of 30 this is a considerable undertaking, demanding as it does a thorough investigation into the last decade in British and global banking that led to the near collapse of the Western financial system and a raft of scandals that still threaten the industry’s survival.

Beneath this umbrella, the Commission has established nine official sub-panels to look into various aspects of the industry, ranging from “retail competition” and “the consumer and SME experience of banks” to “the operation of wholesale markets” and “tax, audit and accounting”.

As if this were not enough to be getting on with, Tyrie and Lord Turnbull have taken it upon themselves to effectively produce their own report into the collapse of HBOS that has seen several members of the defunct lender’s former management team called to publicly account for their roles in its failure for the first time.

Tyrie has made no secret of his desire to slow the whole process down, warning last week that the breakneck speed at which the Commission was being asked to work risked creating a “lawyer’s charter”.

“We cannot be sure, the House of Commons is being asked to get the Bill on the Statute Book before either the Banking Commission or the Treasury Committee have even had a chance to examine it,” said Mr Tyrie in a statement last week.

The Commission has repeatedly pushed the Government to consider dropping its plan to legislate through amendments to the existing Financial Services and Markets Act and instead produce a “fresh bill”, an idea that also has the support of outgoing Bank of England Governor, Sir Mervyn King.

The work of the Commission has been made harder by a spate of new revelations about the past misdeeds of the banking industry that have simultaneously widened the number of institutions in the spotlight while also expanding the areas into which it is required to delve.

Less than a month after its July launch, Standard Chartered (Other OTC: SCBFF.PK - news) , one of Britain’s only banks to have remained untainted by scandal in the wake of the crisis, was described as a “rogue institution” and accused by the New York (Frankfurt: A0DKRK - news) authorities of being involved in hiding $250bn (£154bn) of transactions linked to Iran.

Standard Chartered subsequently agreed to pay a $340m fine and last week was hit with further penalties by other US agencies totalling $327m. This latest fine was followed a day later by HSBC’s record $1.9bn settlement with the US authorities over allegations that it was involved in processing billions of dollars in transactions connected to drug trafficking and terrorist organisations in Mexico.

Following the revelations of these and other scandals, including interest rate swap mis-selling , which The Sunday Telegraph and The Daily Telegraph did much of the work to uncover, the Commission is understood to have formed another separate panel under the guidance of former Treasury Select Committee chairman, Lord McFall, to specifically examine these issues.

With evidence still coming in, much of it vigorously contested by the banks, the job of working out what lessons should be learnt from the various crises has been made that much more difficult. As the panel on HBOS has shown, many of those involved in these scandals remain, if not unrepentant about the past, surprisingly unreflective on it. Such was Mr Tyrie’s annoyance with the testimony of former HBOS chairman, Lord Stevenson, that he branded his evidence “evasive, repetitive and unrealistic”.

“Some witnesses have been very frank with us, and it has been clear to us from their evidence that some have been looking the reality of this catastrophic series of events in the face, and some have not. I regret to say that on the basis of what I have heard over three-and-a-half hours, the evidence today has been in the latter category,” said Tyrie.

Beyond next week, whatever report, or reports, the Commission finally publishes in early 2013, it seems likely it will contain tough recommendations for the banking industry. Among the suggestions it might make could be to introduce new professional qualifications, harsher disciplinary measures and structural changes.