The Banking sector reforms & how they will affect you

The Independent Commission on Banking's report was launched today and while hailed by politicians, you won't actually reap the benefits from most of the 'once in  a generation' reforms until 2019 at the very earliest - as I explain below.

What is the Independent Commission on Banking (ICB) and what was the point of the report?

The commission was set up by the Chancellor, George Osborne, last year to look into ways that the banking sector could be reformed in order to improve stability and competition. In particular, the government want to avoid a repeat of the taxpayer bailouts witnessed after the 2008 banking crisis. The ICB is led by economist and academic Sir John Vickers.

What did the ICB recommend as part of their banking reforms?

The full report is a beast of document at 358 pages long. If you have the time and inclination to read it here is the full ICB report. But for those of you who have better things to do with your life I've highlighted some of the recommendations below:

• Banks should ring fence their retail banking activities from their investment banking operations to avoid a repeat of the 2008 banking crisis
• Ring fenced banks should have separate boards
• Retail banks should be barred from providing certain risky services
• Banks should keep 17-20% of assets as "loss-absorbers"
• Government must ensure that the Lloyds branch sale (672 in all) is used as an opportunity to bring a new competitor into the market
• A new system is implemented to help customers switch current accounts quickly (within in 7 days) and for free

When will the reforms come in?

The Chancellor can act upon or ignore the recommendations within the report. However, George Osborne has already described the report as 'impressive' and plans to stick to the recommended timetable by passing the necessary legisilation before the 2015 General Election. That being so then:

• the sale of Lloyds TSB branches is to be completed by 2013
• the reforms to account switching will be seen by September 2013
• the rest of the banking reforms should be in place by 2019 at the latest

So what are the positives

Quite simply if the reforms a) happen and b) achieve their goal then we should have a safer more competitive banking sector (from a consumer perspective).

So what the negatives

The biggest one is cost. It is estimated that the cost to the banks in completing these changes will be between £4bn-7bn. The British Bankers' Association claim that the ICB's proposals will be "significantly costly and have an impact on lending", implying that cost of borrowing for  individuals and businesses could rise. Given that the banking reforms only affect the UK banking sector there are concerns that the changes will make the sector uncompetitive compared to its European and global rivals, which would have a detrimental affect on the UK's fragile economy.

Also the lengthy timetable for implementation gives the banking sector plenty of time to challenge and campaign against the reforms.

How will the reforms affect me now?

Well they won't as they are still proposals which require legislative changes in order to be implemented. Even then the timetable for changes is in 'years'. The first thing you will likely see is an improved bank switching facility in a few years. While Lloyds TSB customers whose branch is sold (as mentioned above) will see their accounts move to the new buyer.