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Why ring-fencing gives the UK a competitive advantage

One of the architects of plans to ring-fence UK banks’ retail operations from their investment arms says it will create the world’s most transparent, consistent and robust regulatory regime and make Britain a global destination for capital.

Bill Winters, a member of the Independent Commission on Banking, said its recommendations come at some cost to UK banks but will make them more competitive in the long run.

The chief executive of asset manager Renshaw Bay also criticised European regulators for unveiling “bad policies” on banker bonuses and financial transactions which he described as “own goals”.

Speaking after a panel discussion at the RBS Macro Conference in London, Winters said: “Investment capital is attracted to jurisdictions that demonstrate strength and consistency – that’s why money has flowed into Switzerland throughout time. Ring-fencing will bring that level of stability to the UK.

“Our plan will put investors’ minds at rest because it materially reduces the likelihood of another bank-led financial crisis.

“I have no doubt that other countries will be every bit as rigorous in introducing similarly impactful measures over time – they’ve already started – but the UK will get a head start and that gives it a competitive advantage.”

The ICB, chaired by Sir John Vickers, was set up by the UK Government to review the banking sector following the financial crisis.

Its report covering ways to avoid future bank failures was published in September 2011, recommending that a bank’s retail business should be ring-fenced from its investment arm by 2019. This plan is being adopted by the government.

Winters said: “Firstly, we looked long and hard at the costs of ring-fencing and, although they are there, they are small, and in my view worth it when you look at the benefits it will bring.

“Financial services makes up 14 per cent of the UK economy. Only two per cent of that comes from global investment banking, but it’s this side of the business driving intense regulatory pressure on UK financial services. The ICB recommendations have little impact on the other 12 per cent – retail banking, insurance, asset management, etc.

“This pressure can discourage people from establishing in or moving operations to the UK. Separating out the investment businesses will help bring much greater confidence to the market.”

He added: “I know that some think otherwise but I have yet to hear a compelling argument that convinces me we got it wrong.”

The CEO and chairman of alternative asset management company Renshaw Bay said he was in favour of “electrifying” the ring-fence but only to a degree.

He said: “There have been calls for regular reviews of the ring-fence by regulators and the ability to make the banks sell-off their investment businesses completely if it’s not working. That goes further than what we suggested in our report, but makes sense in my view.

“I am, however, against suggestions that, if ring-fencing doesn’t work even at just one bank, the entire UK banking industry should be restructured. That would be too extreme, and why should all banks be impacted if just one of them can’t get it right?”

Winters described the EU’s plans to curb bankers’ bonuses and introduce a financial transaction tax as political point-scoring.

The EU is proposing to cap bonuses to 100 per cent of a banker’s annual salary or 200 per cent if shareholders approve. All relevant countries have approved the plan except the UK, which is concerned it could drive away talent, restrict growth and harm Europe’s competitive standing. A vote will be taken next month.

Meanwhile, a transaction tax of 0.1 per cent for shares and bonds and 0.01 per cent for derivatives will apply to all relevant transactions under European Commission plans tabled last month. The commission claims this could raise EUR30-35 billion a year.

Winters said that, in reality, the bonus cap would fail to lower bankers’ remuneration, it would just make it more onerous for banks to pay those amounts.

And on the transaction tax, he said: “There are arguments that it will reduce high frequency trading and therefore help small investors, but they are tenuous at best. Introducing such a tax in Europe will simply send market practitioners elsewhere.”

He added: “Nobody can deny the severity of the financial crisis. In the UK alone, cumulative GDP lost relative to potential will total over 60 per cent. It’s going to be 40 years before the economy gets back on track.

“While a number of reforms, such as the package coming out of Basel III, will undoubtedly bring greater stability to the markets, others seem to be more about making a political point than getting anything done.”

“Banking has been demonised. The industry has become such a political hot potato that authorities are doing whatever they can to show they are dealing with it. This has unfortunately led to some bad policies and the European regulators scoring some own goals.”

Winters also thinks that the Liikanen Review, which proposes similar ring-fencing plans to the ICB across the continent, won’t happen as Germany and France have indicated they intend to water it down substantially. 

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The statements and opinions expressed in this article are solely the views of Bill Winters speaking at an RBS Macro Conference in London on March 14, 2013 and do not necessarily represent the views of the Royal Bank of Scotland.

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