Today the long and messy process of reforming the banking sector to avoid another catastrophe got shaken up by the publication of the Parliamentary Commission on Banking Standards’ report on the reforms. A shake up which could also affect the way the reforms impact charities.
The Commission was set up following the LIBOR scandals to look at standards in banking, and was also tasked with conducting pre-legislative scrutiny of the Banking Reform Bill, the Treasury’s package of measures (based on the Independent Commission on Banking’s recommendations) to reform the banking sector to increase competition, stability and integrity.
The Commission’s scrutiny has turned out to be on the ‘critically probe’ end of the scrutiny spectrum rather than just a weak inspection to back up the proposals. The main headline of the 140 page report was that the proposed bank ring-fence (separating retail and investment activity) should be ‘electrified’ – i.e. measures should be put in place to prevent banks from pushing the limits and chipping away at the ring-fence. They suggest allowing the regulator to force a full structural separation on a bank if its ring-fence is not working as it should, and a periodic review of the effectiveness of ring-fencing across the sector to consider whether separation would be a better option.
What we’re particularly interested in, however, are their thoughts on the introduction of depositor preference. We met with Treasury and did some work on the effect the measure would have on charities – in a nutshell, depositor preferences places ‘insured’ deposits (those covered by the Financial Services Compensation Scheme, FSCS) at the top of the creditor queue for payout when a bank fails, meaning the claims of other creditors , including charities, are pushed further back. We were concerned that depositor preference would result in charities losing a higher proportion of their deposits in the case of bank failure (see our consultation response for further details).
The Commission’s report highlights some of the problems with depositor preference: that it would force increased losses on those it wouldn’t really be desirable to force losses on, citing examples provided by Which? and the ICAEW (plus our own evidence) such as larger charities, schools, local authorities and individuals holding more than £85k (the FSCS compensation limit) in the bank to buy a house or after an insurance pay-out. This in turn would be politically problematic – would MPs really be able to leave creditors in their constituencies like these to just accept big losses if a bank collapsed? The report says that it’s ‘unconvincing’ that all creditors would be treated the same in these circumstances.
Their resulting recommendation is that the Government and Bank of England create a joint group to produce a full report on the ‘implications for resolution of depositor preference and of the scope and extent of depositor insurance’. They also suggest the report should consider ‘the feasibility of establishing a voluntary scheme of insurance for deposits over £85,000 with arrangements for opt-out’. If this goes ahead it will be interesting to see what direction things go in – and could potentially mean good news for charities.