House of Lords House of Commons Changing banking for good Report of the Parliamentary Commission on Banking Standards Volume II: Chapters 1 to 11 and Annexes, together with formal minutes HL Paper 27-II HC 175-II House of Lords House of Commons Parliamentary Commission on Banking Standards Changing banking for good First Report of Session 2013–14 Volume II: Chapters 1 to 11 and Annexes, together with formal minutes Ordered by the House of Lords to be printed 12 June 2013 Ordered by the House of Commons to be printed 12 June 2013 HL Paper 27-II HC 175-II* Published June 2013 by authority of the House of Commons London: The Stationery Office Limited £0.00 Parliamentary Commission on Banking Standards The Parliamentary Commission on Banking Standards is appointed by both Houses of Parliament to consider and report on professional standards and culture of the UK banking sector, taking account of regulatory and competition investigations into the LIBOR rate-setting process, lessons to be learned about corporate governance, transparency and conflicts of interest, and their implications for regulation and for Government policy and to make recommendations for legislative and other action. Current membership Mr Andrew Tyrie MP (Conservative, Chichester) (Chairman) Most Rev and Rt Hon the Archbishop of Canterbury (Non-Affiliated) Mark Garnier MP (Conservative, Wyre Forest) Baroness Kramer (Liberal Democrat) Rt Hon Lord Lawson of Blaby (Conservative) Mr Andrew Love MP (Labour/Co-operative, Edmonton) Rt Hon Pat McFadden MP (Labour, Wolverhampton South East) Rt Hon Lord McFall of Alcluith (Labour/Co-operative) John Thurso MP (Liberal Democrat, Caithness, Sutherland and Easter Ross) Lord Turnbull KCB CVO (Crossbench) Powers The Commission’s powers include the powers to require the submission of written evidence and documents, to examine witnesses, to meet at any time (except when Parliament is prorogued or dissolved), to adjourn from place to place, to appoint specialist advisers, and to make Reports to both Houses. A full list of the Commission’s powers is available in the House of Commons Votes and Proceedings of 16 July 2012 on page 266, and the House of Lords Minutes of Proceedings of 17 July 2012, Item 10. Publications The Reports and evidence of the Commission are published by The Stationery Office by Order of the House. All publications of the Commission (including press notices) are on the Internet at http://www.parliament.uk/bankingstandards. Commission staff The following parliamentary staff worked for the Commission: Colin Lee (Commons Clerk and Chief of Staff), Adam Mellows-Facer (Deputy Chief of Staff), Lydia Menzies (Second Clerk), Sian Woodward (Clerk), Richard McLean (Lords Clerk), Lucy Petrie (Second Clerk), Jay Sheth (Commission Specialist), Gavin Thompson (Commission Specialist), James Abbott (Media Officer), James Bowman (Senior Committee Assistant), Tony Catinella (Senior Committee Assistant), Claire Cozens (Senior Committee Assistant), Emma McIntosh (Senior Committee Assistant), Rebecca Burton (Committee Assistant), Katherine McCarthy (Committee Assistant), Daniel Moeller (Committee Assistant), Baris Tufekci (Committee Assistant), Ann Williams (PA to the Chief of Staff) and Danielle Nash (Committee Support Assistant). The following staff were seconded from outside of Parliament to work for the Commission as Commission Specialists: Philip Airey, Amélie Baudot, Paul Brione, Suvro Dutta, Oliver Gilman, Oonagh Harrison, Sadiq Javeri, Robert Law, Zoe Leung-Hubbard, Mayur Patel, Julia Rangasamy, John Sutherland, Greg Thwaites and Elizabeth Wilson. Contacts All correspondence should be addressed to the Clerks of the Parliamentary Commission on Banking Standards c/o the Treasury Select Committee, 7 Millbank, London SW1P 3JA. The telephone number for general enquiries is 020 7219 8773; the Commission’s email address is [email protected]. Volumes of this Report This Report is the Fifth Report of the Commission (and the First Report of Parliamentary Session 2013–14). It has nine volumes: Volume I: Summary, and Conclusions and recommendations Volume II: Chapters 1 to 11 and Annexes, together with formal minutes Volume III: Oral evidence given to the Commission Volume IV: Written evidence given to the Commission Volume V: Written evidence given to the Commission Volume VI: Written evidence given to the Commission Volume VII: Oral and written evidence given to Sub-Committees A and B Volume VIII: Oral and written evidence given to Sub-Committees C, D, E, F and G Volume IX: Oral and written evidence given to Sub-Committees H, I, J and K Lists of witnesses who gave evidence and lists of people or organisations who submitted written evidence are given in the relevant volumes of the Report. *House of Commons Printing Numbers This Report is printed under House of Commons Printing number HC 175. It also incorporates papers ordered for printing in Session 2012–13 under the following House of Commons printing numbers: HC 606-i to –xl, HC 619-i to –ii, HC 705-i to –viii, HC 783-i, HC 706-i to –v, HC 821-i to –iii, HC 710-i to –ii, HC 784-i, HC 881-i to –v, HC 804-i to –ii, HC 860-i to –iv, HC 945-i Footnotes In the footnotes of this Report, references indicated by ‘Q’ and followed by a question number refer to oral evidence taken by the Commission, published by the Commission in the third volume of this Report. References indicated by ‘Ev’ followed by a page number refer to written evidence published by the Commission in the fourth and fifth volumes. References indicated by ‘Q’ preceded by a letter, for example, ‘AQ’ or ‘BQ’, and followed by a question number refer to oral evidence taken by the sub- committees of the Commission. For example, ‘AQ’ refers to oral evidence taken by sub-committee A: Panel on the consumer and SME experience of banks, and ‘BQ’ refers to oral evidence taken by sub-committee B: Panel on HBOS. There were eleven sub-committees and their evidence is published by the Commission in the seventh, eighth and ninth volumes of this Report. References indicated by ‘Ev’ preceded by a letter, for example, ‘A Ev’ or ‘B Ev’, and followed by a page number refer to written evidence to the sub-committees of the Commission, published by the Commission in the seventh, eighth and ninth volumes of this Report. References indicated by ‘Ev’ preceded by FR or TR refer to written evidence published online with the Commission’s First and Third Report, respectively, and printed in the sixth volume of this Report. Changing banking for good 75 Contents Report Volume I Page Summary 8 Conclusions and recommendations 14 Report Volume II 1 Introduction 82 2 The public experience of banks 85 Introduction 85 The bail-outs 86 Failing to serve customers 88 Introduction 88 Sales culture, cross-selling and mis-selling 88 Scandal after scandal 99 ‘Masters of the universe’ 102 Conclusion 104 3 The underlying causes 105 Introduction 105 This time is different 105 Incentives to become unmanageable 111 Too big to fail 111 Too big and too complex to manage 113 Loose federations of money-making franchises 115 Blinded by science 118 An accountability firewall 122 Paid too much for doing the wrong things 126 Falling bonuses, rising salaries 126 Payment by the wrong yard sticks 128 Incentives to mis-sell 130 Inadequate checks and balances 131 An absence of collective responsibility 131 Out of control 138 Regulation: barking up the wrong tree 142 Overview 142 A tendency towards rules and complexity 143 The role of supervisors 145 The quality of regulators 147 A lack of market discipline 148 Competition and standards 148 Concentration and choice 149 76 Changing banking for good Barriers to entry 151 A mismatch of information 152 Incentives to pull in the wrong direction 154 The role of shareholders 154 Conflicts and complacency in external assessment 155 The wrong tax incentives 159 Levers of power 160 Insufficient downsides 161 Overview 161 Doing the decent thing 161 Regulatory penalties on individuals 162 Fines for firms 164 Conclusions 165 4 Tackling resistance to reform 166 Introduction 166 It’s all under control 166 The aims of current reforms 166 Financial stability: a work in progress 168 Risks to the competitiveness of the UK banking sector 172 Overview 172 International competitiveness 174 European obstacles 183 Shadow banking 185 Biting the hand that feeds us 188 Capital and lending 188 Attractiveness of banks for investment 189 Overcoming resistance 192 5 Better functioning markets 193 Introduction 193 A vital utility role 193 Serving vulnerable members of society 193 Underpinning utility provision 195 Community finance and poorly-served communities 199 Competition in retail banking 202 Introduction 202 Competition and standards 202 Direct measures to reduce concentration 204 Barriers to entry 206 Alternative modes of provision 215 Peer-to-peerand the rise of the internet 217 Bringing alternative providers into the regulatory orbit 220 Enabling customer choice 223 Introduction 223 Common utility platform 224 Account portability 226 Seven-day switching service 228 Changing banking for good 77 Switching fee 229 Assessing the options 231 A market investigation reference 233 Tackling the information mismatch 240 Introduction 240 Duty of care 241 Empowering consumers through service standards 244 Tackling the legacy of RBS 247 Background 247 Rebuilding the balance sheet 248 The effects of public ownership 253 RBS’s current strategy 256 Obstacles to early disposal 257 Other strategies 259 A ‘good bank / bad bank’ split 260 Challenges in creating