Buy-side trade body the Investment Management Association (IMA) has urged the UK government to include derivatives as part of proposed reforms that would ringfence retail banking from investment banking.
The IMA, whose members manage around £3.9 trillion in assets under management, made a submission to the Parliamentary Commission on Banking Standards which stressed that the structure of banking and incentives need to be urgently addressed.
The submission – based on a recent government white paper released that advocated the separation of retail and investment banking activity – criticised the UK government’s decision to exclude derivatives from the ringfencing proposals, adding that recent mis-selling of interest rate swaps should cause the government to review its position.
It also noted the decline in relationship banking and focus on transactions from retail banks and added that the underlying incentive structures within banks encourage excessive risk taking.
“Questions need to be asked about the ‘universal banking’ model under which banks not only transact with their customers but also purport to offer advice and guidance,” IMA CEO Richard Saunders wrote in a 29 August blog. “There is an inherent conflict of interest between the two if you are holding yourself out as offering a service while in reality treating your customer as an equal part to a transaction.”
Saunders added that in addition to the credit crisis in 2007-2008, the on-going LIBOR investigation reinforced these views.
The proposals to split retail from investment banking were first made in a report by Sir John Vickers, head of the UK’s Independent Commission on Banking in September last year. While the government adopted the bulk of Vickers’ proposals, it was accused of watering down a number of key reforms.
“We previously supported the Independent Commission on Banking’s recommendation about which activities should be outside the ring fence, and would encourage Government to review its decision not to follow Vickers’ proposals in full,” said Liz Murrall, the IMA’s director of corporate governance and reporting. “Moreover, in any final recommendations it is important to consider any potential negative impact on the UK’s leading position in the international financial services industry and on credit provision to the economy.”
The Parliamentary Commission on Banking Standards asked for comment on the professional standards and culture of the banking sector, including views on the LIBOR investigation, corporate governance and conflicts of interest. The Commission is required to report on potential legislative options by 18 December.