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Exclusive: Virgin Urges Banks Split

(c) Sky News 2012

Bankers’ pay should be subject to more stringent regulatory caps and there should be full separation of retail and investment banks in order to accelerate industry reforms, according to the lender that bought the taxpayer-controlled Northern Rock.

I have been leaked a summary of the submission by Sir Richard Branson's Virgin Money to the Parliamentary Commission on Banking Standards, which is examining measures to overhaul industry practices following a string of crises in recent months.

In it, Virgin Money advocates wide-ranging changes that it claims would level the playing field for new entrants to the high street banking sector, as well as restoring the reputation of the embattled industry.

The company's calls for reform underline the extent to which banks are attempting to demonstrate that they recognise the depths to which their industry has sunk in the wake of the payment protection insurance mis-selling and Libor manipulation scandals.

Last month, Sky News obtained Barclays’ evidence to the inquiry, which argued for tough new sanctions for bankers found guilty of malpractice.

"To restore trust in banking, we believe that two key issues are the introduction of a professional code of conduct with simple principles, and the separation of retail banking and investment banking," Virgin Money said in its submission.

Arguing for the "full professionalization of banking", the company said the ring-fencing of Britain’s banks, as proposed by the Independent Commission on Banking, would not go far enough.

"Retail banking and investment banking are different businesses," Virgin Money said.

"Retail banking is about long-term customer relationships, investment banking is about short-term transactional activities.

"The cultures in retail banking and investment banking are quite different.

"The fundamental differences between retail banking and investment banking are reflected in the different accounting treatment of loans in the banking book and assets in the trading book.

"We believe that there is a strong case for the full separation of retail banking and investment banking."

Such a separation is unlikely to result from the Commission’s work given that George Osborne, the Chancellor, has already backed the ring-fencing idea.

The panel of MPs (BSE: MPSLTD.BO - news) and Peers may, though, endorse some of Virgin Money's other suggestions, which include a standardised approach to risk management across the industry rather than relying on individual institutions’ risk management models.

Virgin Money also raised the possibility that established banks should be forced to sell parts of their branch networks if they fail to deliver a robust new framework to aid customers who want to switch their bank account provider.

Analysts pointed out that many of Virgin Money's recommendations were potentially self-serving in that they advocated greater opportunities for emerging players in the retail banking sector.

The bank's takeover of Northern Rock was today being scrutinised by members of the Public Accounts Committee.

On the subject of bankers' pay, it argued in its submission that a formal cap on pay might be necessary.

"There appears to be need for some regulatory parameters for bonuses and total remuneration (at least in ring-fenced banks), supported by shareholder oversight," it said.

"For shareholder discipline to be effective, we suggest that banks should be required to give information about their bonus schemes and bonus payments, and about their total risk exposures and changes in their risk exposures."

Virgin Money also said that bank boards should have only two executive directors in order to strengthen the ability of non-executives to challenge decision-making; that banks should advertise for some non-executive vacancies; that whistleblowers should be afforded proper protection; and that banks’ auditors should engage in more active dialogue with industry regulators.

The Commission, chaired by Andrew Tyrie, who also heads the Commons Treasury Select Committee, is due to report its recommendations before the end of the year.

Neither it nor Virgin Money would comment.