U.K. Lawmakers Mull Call for Added Scrutiny of Bank Law

U.K. lawmakers may call on Chancellor of the Exchequer George Osborne to give them extra powers to block detailed legislation aimed at regulating banks in a report to be published later this week.

Members of the Parliamentary Commission on Banking Standards may demand that lawmakers be given automatic powers to scrutinize so-called secondary legislation, after urging such a move in hearings. The panel is still agreeing on the final wording of the report. The government normally implements such detailed legislation on its own under powers granted by Parliament.

“We want to see the color of the secondary legislation so that we can judge the effectiveness of the primary legislation on which it depends,” Andrew Tyrie, the Conservative chairman of the cross-party panel, said during a hearing with Osborne in London on Nov. 21.

The commission of lawmakers from both houses is scrutinizing the Financial Services Reform Bill, which will implement plans to erect firewalls around lenders’ retail units. A separate report by the panel into ethics in the banking industry commissioned by Osborne in the wake of the Libor- rigging scandal will be released next year.

The legislators on the panel are trying to overturn a method of passing the secondary legislation, which effectively allows the Treasury to propose the laws and implement them unless parliamentarians raise objections. Instead, they are seeking an affirmative mechanism that requires the secondary laws to automatically face scrutiny by lawmakers.

‘Policy Problem’

“There is a policy problem here,” opposition Labour Party lawmaker Pat McFadden said during the hearing with Osborne. “The policy problem is the banks’ ability and record to lobby and to get round things. The way that you have set this up is to leave an awful lot” to the discretion of a regulator.

A demand from the committee for more powers would set the committee up for a clash with Osborne. The chancellor can ignore their recommendations, though he might then face a backlash from rank-and-file lawmakers in Parliament. Osborne set up the panel to look at conduct in the banking industry following the Libor scandal earlier this year and extended its powers to provide pre-legislative scrutiny of the banking bill.

Tyrie complained to Osborne Nov. 21 that the chancellor had not passed on details of legislation to the panel. Osborne warned the commission against “unpicking a consensus” over “ring-fencing,” as the plans are known in Britain.

Treasury minister Greg Clark said during his testimony alongside Osborne that the government would decide which parts of secondary legislation need extra scrutiny and that “there will be a lot of opportunity” for such oversight in future.

Breakup Powers

Lawmakers also called in hearings for the bill to be toughened so that regulators have the power to break up banks if they fail to comply with the firewall regulations. Such a move would be aimed at deterring aggressive lobbying by banks to water down implementation of the rules.

Successive witnesses at the committee’s hearings have expressed concern that proposals by the Independent Commission on Banking, led by Oxford University Professor John Vickers, which provided the basis of the legislation, will be diluted by the banks before they are properly implemented.

Andrew Haldane, the Bank of England’s executive director for financial stability, said on Nov. 7 that proposals have a “gray area” that may be manipulated by banks. The threat of full separation is “quite a clever way of ensuring that Vickers is implemented faithfully and achieves what it is meant to achieve,” Haldane said.

Even Vickers, who said the powers he proposed would in themselves be enough to make the banking system safer, told the panel on Nov. 12 he would not be opposed to putting powers on the statute book that would strengthen the firewall.

As well as regulation, the parliamentary commission will develop proposals on banking governance, transparency and conflicts of interest. Vickers recommended in 2011 that banks separately capitalize and manage consumer-banking activities to strengthen the financial system.

The Treasury said it had no comment on the panel’s possible recommendations before the publication of the report.

To contact the reporter on this story: Gonzalo Vina in London at gvina@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net

Bloomberg reserves the right to edit or remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.