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U.K. Commission Set to Review Derivatives Sold by Consumer Banks

U.K. Chancellor of the Exchequer George Osborne has asked a parliamentary commission to investigate whether consumer banks subject to firebreaks should be able to offer simple derivatives to clients.

“Recent events involving the mis-selling of derivative products have demonstrated the need for robust conduct, as well as resolvability, safeguards, an area that the Parliamentary Commission on Banking Standards will be investigating,” the Treasury said today in proposed legislation on banking.

The draft Financial Services (Banking Reform) Bill has adopted measures to build firebreaks around consumer banks in an effort to reduce the prospect of a taxpayer bailout in a future crisis. The proposed legislation comes after banks set aside at least 9 billion pounds ($14.5 billion) to redress customers mis-sold loan insurance and interest-rate swaps.

The Parliamentary Commission on Banking Standards, led by Andrew Tyrie, is probing governance, transparency and conflicts of interest in the industry and will develop proposals by Dec. 18.

The banking legislation may cut the value of the government’s stakes in Royal Bank of Scotland Group Plc and Lloyds Banking Group Plc by as much as 5 billion pounds, according to the draft bill. It would cut tax receipts by as much as 400 million pounds based on plans to protect deposits as “preferential debt,” placing them above other creditors in the event of a bank collapse.

The legislation in total may cost the economy 1.1 billion pounds a year in reduced gross domestic product, it said.

“The main driver of the level of annual tax receipts is the level of GDP: all else being equal, lower GDP would therefore result in lower tax receipts for the Exchequer,” the treasury said in the draft legislation.

-- Editors: Jon Menon, Keith Campbell

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