The revelations of large losses at UBS last week could not have been better timed to reinforce the case for ringfencing retail banking. Kweku Adoboli’s activities apparently involved implementation of arbitrage strategies to replicate the liabilities of synthetic exchange traded funds. Whatever the profitability of these transactions, they should not be underwritten by UBS depositors or Swiss taxpayers.
But effective ringfencing depends on effective implementation of its detail. Retail banks’ exposure to other financial institutions must be severely constrained; derivative transactions must be limited to those necessary for everyday banking; retail banks can no longer be allowed to cast their treasury operations as profit centres with a distressing tendency to become loss centres. Retail banks’ boards must be sufficiently independent to support a culture very different from the one in which Mr Adoboli operated.
The proposals of the Independent Commission on Banking would allow up to eight years to implement this in the UK. This is too long. Not just because it is a long time to wait. The graver concern is that reform phased in over an extended period will not be effectively implemented at all.
The commission has finished its work, and will be dissolved. As evidence and argument have been developed, informed public opinion has become more and more supportive of its proposals. The commission’s members and staff will now turn to other activities and commentary will focus on other issues. But lobbyists never go away. Public opinion, well briefed and properly marshalled, is a decisive force in public policy. But since there are many issues in public debate, attention to any one is necessarily transient. The attention of vested interests to their own concerns, however, is permanent.
On the same day the banking report was published, the European Union’s Council of Ministers approved a proposal to extend the term of copyright in sound recordings from 50 to 70 years. Every independent assessment – including a report commissioned from this paper’s former editor, Andrew Gowers, and another review on the implications of intellectual property for economic growth, provided by Ian Hargreaves only this spring – has reached the same conclusion. The cost of such extension to the public far exceeds any benefit.
The effect is to transfer money from the public to a small group of record companies that published popular music many decades ago – principally the Citigroup-owned EMI. Outrageously, the representatives of these companies have persuaded musicians to front their lobbying effort in return for a modest share of the proceeds of extension.
The proposal has been beaten off several times by a small group of disinterested people – mainly academics. But they are under-resourced, and have other things to do. The lobbyists, in contrast, are over-resourced and have nothing else to do. Wherever the proposal is rejected, its advocates revive it in another forum at another time. Eventually they get their way. The lobbyists never go away.
And not in British banking. In a column two years ago, I told the story of the Payments Council. Another independent review of the banking industry – commissioned a decade ago – concluded that the operation of the payments system restricted competition in banking. The recommendation of the Cruickshank report, which the government also accepted, was that a payments regulator be established to limit prices and encourage access.
Then the lobbying began. The outcome was the establishment, seven years later, of the Payments Council: not an independent regulator, but a membership organisation controlled by banks, which appoint 11 of the 15 directors. A recent report of the parliamentary Treasury Committee concluded that “consumers are entitled to be suspicious of the motives of such a body”, observing that it is “an industry-dominated body with no effective public accountability”. Only the interest groups could disagree.
The Vickers report raises issues more fundamental than the Cruickshank report. Its proposals must not suffer the same fate.