16:18
Tieng Anh Vui
Senior bankers guilty of reckless misconduct should be jailed, a long-awaited report on banking commissioned by the government has recommended.
The Parliamentary Commission on Banking Standards was set up by Chancellor George Osborne last year after a number of scandals involving the industry.
The cross-party group's fifth report attacked the lack of accountability of bankers and also said some bonuses should be withheld for up to 10 years.
The Treasury has welcomed the report.
It called it "a very impressive piece of work" and promised to provide a response before the summer recess.
"Where legislation is needed, we have said we will support it, and the banking bill currently before Parliament can be amended to ensure they are quickly enacted," a spokesman added.
The 571-page report also called on the government to review alternatives for selling off the Royal Bank of Scotland (RBS), including breaking it up, and demanded action to make the banking market more competitive.
Criminal liability
"Too many bankers, especially at the most senior levels, have operated in an environment with insufficient personal responsibility," the report says.
"Senior executives were aware that they would not be punished for what they could not see and promptly donned the blindfolds.
"Where they could not claim ignorance, they fell back on the claim that everyone was party to a decision, so that no individual could be held squarely to blame - the Murder on the Orient Express defence."
The report advocated:
- senior bankers should be assigned clear personal responsibilities, with the legal onus on them to show they have done all that is reasonably required
- recklessly disregarding these responsibilities should be made a criminal offence - including a possible prison sentence
The commission explained
- The Parliamentary Commission on Banking Standards was appointed in July 2012 following the Libor scandal and other episodes that damaged the reputation of banks in the UK
- It includes MPs and peers and is chaired by Andrew Tyrie, who also heads the House of Commons' Treasury Committee
- Members include the Archbishop of Canterbury, Justin Welby
- It heard evidence from major figures in the banking sector
- senior bankers - and anyone in a position to cause the bank serious harm, such as top traders - should adhere to a new set of banking standards set by regulators
- pay for bankers should be deferred for up to 10 years, with the ultimate payout linked to the long-term performance of the bank and of the employee's particular business area
- deferred pay and pension rights should also be cancellable if a banker misbehaves, or - in the case of senior managers - if the bank has to be bailed out
- banks should be legally required to put financial safety ahead of shareholder interests
"Why are there no banged-up bankers?" said Liberal Democrat peer Lord Oakeshott, who backed the committee's findings. "That's what most people want to know after the last five years of scandals and shame."
RBS conundrum
The report called for more to be done to boost competition among banks, including two further investigations.
One, by a government panel of experts, would look at how to make it easier for people to transfer their bank accounts, while the other would be a full investigation of retail banking and small business lending by the Competition and Markets Authority.
Consumer watchdog Which? welcomed the proposals, saying it could herald "the big change in banking that consumers have been crying out for".
But the group said more needed to be done to change banking culture, and called for an independent code of conduct.
The committee also criticised the male-dominated culture on trading floors, saying banks should be required to publish their gender ratios and take action where there is a significant imbalance.
On RBS, the committee only said that the government should formally consider alternative options for the nationalised bank by September.
One alternative - backed by some but not all committee members - would involve splitting it between a "good bank" - an active High Street lender with a cleaned-up balance sheet - and a "bad bank" - a warehouse for all of the dud loans left over from last decade's debt bubble.
Another option, backed by the Archbishop of Canterbury and committee member Justin Welby, would split RBS up into a number of smaller regional banks.
What the Banking Reform Bill does
- The Ring-Fence: The High Street activities of each UK bank are to be put into a separate subsidiary from its riskier investment banking.
- Electrification: Regulators will be given the power to split up an individual bank altogether, subject to certain conditions, if the regulator deems that bank to be undermining the purpose of the ring-fence. Regulators will also review the entire UK banking industry each year to determine whether the ring-fence is proving effective.
- Deposit Guarantees: The Financial Services Compensation Scheme currently guarantees up to £85,000 of every deposit in a UK bank. Under the bill, if a bank goes bust, the FSCS will be paid out ahead of other people owed money by the bank. It means that the FSCS will be better able to recover the money it has guaranteed, which should reduce the potential bill for taxpayers if there is a shortfall.
- Loss Absorbency: The bill gives the Treasury the power to impose tougher requirements on banks to increase their ability to absorb losses, in particular by requiring a bank to borrow money from markets in a form that allows the bank to impose losses on the lenders if it gets into trouble.
- The Treasury has said the bill may be amended to include recommendations in the Banking Standards Commission's latest report
In any case, the committee cautioned against rushing to privatise the bank, which it said risked getting poor value for the taxpayer, and because the committee believed RBS first needed to be restructured, in order to make sure it played its key role in supporting the economy.
The report also called for an end to the government's purportedly "arms-length" ownership of RBS and Lloyds via the holding company UKFI - an arrangement set up under Gordon Brown and described as a "fig leaf" disguising the government's increasing interference in the running of the two banks, especially RBS.
'Special measures'
The committee also criticised the failure of regulators to spot the risks building up in the financial system prior to 2008, demanding "the replacement of mechanical data collection and box ticking by a much greater emphasis on the exercise of judgement".
Senior regulators should be personally accountable, ultimately to Parliament, for their oversight of the banks.
The report recommended that each bank's board should be required to institute procedures to protect whistle-blowers - employees who want to flag up misconduct to the regulators
The Financial Services Authority, which was the overall banking regulator up to and during the financial crisis, has been split into two separate units - the Financial Conduct Authority, which polices banker behaviour, and the Bank of England's Prudential Regulation Authority, which ensures the banks do not take excessive risks.
If either regulator spots a pattern of shoddy standards at a bank, the commission said that the two should be able to put the bank into "special measures", meaning the bank would be formally required to deal with any shortcomings identified in its general culture or systems.
The committee repeated its demand that the chancellor allow regulators to set a more conservative "leverage ratio" for the banks.
The leverage ratio is the minimum amount of loss-absorbing capital that a bank must hold, as a percentage of its total loans and investments.
Mr Osborne has said the limit should be set at 3%, in line with a new international requirement from the Basel committee of central bankers. But the committee has the figure should be much higher.
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