House of Lords votes through tough new licensing regime for bankers

The amendment to the Banking Reform Bill was one of two major changes to the legislation proposed by peers. The other proposal, which would have introduced a power to separate the banking industry if the Government's proposed 'ring-fence' between retail and investment banking was ineffective, was not voted through.

The Banking Reform Bill will now return to the House of Commons for further debate. MPs will be able to vote against the amendment.

If enacted in its current form, the Banking Reform Bill would 'ring-fence' retail banking activities from a wider banking group's riskier investment activities. Ring-fenced banks will need to be legally and operationally distinct entities from non ring-fenced banks, and will not be able to hold or own the capital of other non ring-fenced entities within the group. Banks would have until 2019 to comply with this requirement.

The Parliamentary Commission on Banking Standards (PCBS) has called for the inclusion of an "explicit" power to force a complete split between retail and investment banking across the industry to be included in the legislation. However, this has been continuously resisted by the Government. The PCBS was set up following allegations of misconduct in relation to LIBOR against domestic and international banks, and has also made a number of recommendations for reform of the professional culture and standards of the UK banking industry.

"As part of its deliberations, the [Independent Commission on Banking, which made recommendations for banking reform in September 2011] considered full separation as an alternative to ring-fencing, but it rejected that alternative and instead recommended ring-fencing," said Lord Deighton, Commercial Secretary to the Treasury. "The Government have accepted the ICB's recommendation, and the commission set out its rationale for rejecting full separation in its final report."

"The ICB argued that a robust ring-fence would deliver the same benefits as full separation, and would avoid some of full separation's main disadvantages. In particular, a ring-fenced bank that found itself in financial difficulties could be supported by other group members, such as a healthy sister investment bank. Full separation would not allow this," he said.

However, legislation has been included in the Bill which would require an independent review of the effectiveness of the ring-fence within four years of it fully coming into force.

The Government committed to implementing the "main recommendations" made by the PCBS earlier this year, including the creation of a new criminal offence of reckless misconduct by senior bankers. It had also agreed to introduce a new two-tier authorisation process for bank staff as part of the Banking Reform Bill.

However Lord Eatwell, proposing the amendment that was ultimately approved, said that the Bill as drafted did not go far enough with regards to the professional standards that would be required from bankers.

"Amendments from the commissioners use the words 'licensing regime', but continuously refer to the adherence to rules," he said.

"The notion of a licence surely refers to some level of professional competence or professional standards. Rules may require the attainment of professional qualifications, but we cannot be sure and, as the Government regularly argue, certainty is important in this legislation ... It seems to me that if members of the professions [such as doctors and lawyers] are required to pass examinations to show professional competence and to undertake rigorous training, bankers should do the same," he said.

The Archbishop of Canterbury added that rather than implement a 'two-tier' process, the amendment would ensure that "employees whose actions or behaviour could seriously harm their employer, its reputation or its customers" would be caught by the licensing regime.

"The amendment is aimed at ensuring that the FCA and the PRA focus their regulatory duties on those employees who could inflict the most significant and material damage on their institutions and on the banking system as a whole," he said. "These are not always the most senior employees ... It is therefore necessary to have an amendment that not only widens beyond the senior management, obviously, but narrows so that it does not try to cover all the employees but has a very focused look at those who are going to be able to do the most damage the most often, and who are at highest risk," he said.

Alongside the debate, the Chancellor of the Exchequer agreed with the Governor of the Bank of England that the Financial Policy Committee (FPC) will carry out a review into the case for whether it should be given any additional powers to adjust the leverage ratio. The PCBS recommended the inclusion of a higher ratio, limiting the amount of risk that banks would be able to hold on their balance sheet, as part of its report on the Bill.

Banking expert Tony Anderson of Pinsent Masons, the law firm behind Out-Law.com, said that it was clear that UK banks would be "left unrecognisable from their pre-crisis models" regardless of whether or not the new amendments were endorsed by the House of Commons.

"Taking into account the amendments to be introduced to existing reforms, banks will need to be gearing up to implement stringent procedures and systems to review and transform their existing business models to accommodate a ring-fenced bank within a wider banking group," he said.

"There is a plethora of change to be digested at the operational level across UK banks under the ICB reforms alone. This includes changes not only impacting their management, culture and values but also, more tangibly, who they employ and which bank in the group employs them, how pensions are funded, how deposits can be invested, what services and products are provided by which bank to their customers, how third-party services are provided to banks and even how they hold or rent property," he said.