UK government supports ring-fencing of retail and investment banking

Britain’s big banks will be broken up by the UK government if they ignore directives to separate their investment and retail arms.

George Osborne, the chancellor of the exchequer – the UK’s finance minister – appears to have accepted this recommendation from the Parliamentary Commission on Banking Standards. His action follows the 2008 crisis, when the government injected £65bn ($100bn, €75bn) to save RBS and Lloyds.

Osborne said the taxpayers would never again be expected to rescue the banks. He said: “The British people need to know that lessons have been learnt. And they have.

“Banks require discouragement from gaming the rules. They will always try to do so unless strong disincentives are put in place.”

Last year, the Independent Commission on Banking proposed ring-fencing to protect retail customers from investment losses. The parliamentary commission is now re-examining the proposals.

Antonio Horta-Osorio, Lloyds Bank’s chief executive, agreed ring-fencing should be applied with “strong enforcement and strong incentives”.

However, British Bankers’ Association chief executive Anthony Browne countered that “electrifying the ring fence” would reduce lending and damage London’s appeal as a financial centre. The intended ring-fencing legislation gives the banks until 2019 to introduce the reforms.

Meanwhile, the Libor-rigging offenders remain in the spotlight. RBS has been fined £390m by the UK and US regulatory bodies, but some critics want prosecutions.

Laura Willoughby, chief executive of Move Your Money, which campaigns to improve the UK banking service, protested: “If cricketers can be jailed for rigging a match, why are there different rules for bankers who rig the interest rates that underpin our entire financial system? The public will not see this as justice.”  

At UBS, fined $1.4bn (£900m, €1bn) by the UK, US and Swiss regulators, “mercenary” traders could have been manipulating Libor rates for years before being discovered, former chief executive Marcel Rohner told the parliamentary commission.

Huw Jenkins, former head of UBS investment banking, admitted Libor-fixing was “very ingrained” in the bank’s activities. Commission members accused Rohner and other executives of “incompetence and gross negligence”.