The Financial Services (Banking Reform) Bill (the Banking Reform Bill) will deliver the most significant reform of the UK banking sector in a generation. The proposals are largely based on the work of the Independent Commission on Banking (ICB), which reported in September 2011.
In particular the bill takes forward the ICB's primary recommendation that retail banking should be separated from investment banking by the use of ring-fencing.
The bill is drafted in broad terms. It provides the framework for reform of the banking sector, while the detail will be left to secondary legislation and rules made by the regulator.
In summary, the banking reform bill will:
- require UK banks to separate everyday retail banking activities from their investment banking activities via the introduction of a ring-fence around the deposits of individuals and small and medium sized businesses. The extent of the ring-fence will be determined by secondary legislation
- give depositors who are protected under the Financial Services Compensation Scheme preference if a bank enters insolvency, and
- give the government the power to ensure that banks are better able to absorb losses during a crisis and empowers the Prudential Regulation Authority with responsibility for holding banks to account in relation to their ring-fence.