BBA The voice of banking Fri, 27 Mar 2015 15:15:46 +0000 en-US hourly 1 This week in Westminster Fri, 27 Mar 2015 15:08:32 +0000 Read More]]> BBA manifesto tracker – here you can read the manifesto commitments relating to banking and financial services by the three main political parties.

BBA manifesto tracker (minor parties) – here you can read policy proposals relating to banking and financial services by the SNP, UKIP and the Green Party.

Treasury Select Committee

Chancellor George Osborne gave evidence to the Treasury Select Committee on measures announced in Budget 2015. Topics of discussion included the Bank Levy, tax returns, remuneration and tax avoidance.

Conservative MP Mark Garnier asked if the rise in the Bank Levy was a response to Labour’s proposed bonus tax. The Chancellor responded that he had always been clear that the Bank Levy was designed to achieve two things: one to bear down on leverage and wholesale funding and alike of balance sheets; and two to ensure banks make a contribution to the consolidation.

Committee Chair Andrew Tyrie asked the Chancellor if the rise breached the principle that as risks from the banking sector to the economy fall, the levy might also fall. Mr Osborne replied that the reason for the Bank Levy is both to create a safer financial system and also explicitly to raise revenue. He added that he was very clear in 2010 that when he replaced the bonus tax with the Bank Levy that it was a more effective way of getting the banking sector to make a contribution.

Mr Tyrie then questioned whether the Bank Levy will be necessary when fiscal consolidation has been achieved and when banks are no longer too big to fail. The Chancellor responded: “I think the Bank Levy is going to be here to stay. I think it’s perfectly reasonable as a society to ask the banking sector to make a contribution, it receives all sorts of support from the Government, even if we are of course trying to remove and reduce the implicit guarantee that did exist.“ Responding to Jesse Norman MP, Mr Osborne added that billions of pounds of public money was used to support the sector, “which is something I suspect will stay very long in the memory of the British people.”

Alok Sharma asked if clawback of fixed remuneration should be examined at an international level. Mr Osborne responded that the Financial Stability Board was well placed to look at it, and that a perverse consequence of the EU bonus cap is that it makes it harder to get back remuneration for wrongdoing as fixed salaries have increased.

Committee Chair Andrew Tyrie noted that clawback can be complicated, and suggested that this pointed to longer levels of deferral. Mr Osborne said that these decisions are best made by regulators and they are now taking this up at an international level.

Responding to John Thurso, the Chancellor said the Common Reporting Standard will make it very hard for people to hide money in offshore bank accounts. He found it interesting that people in the Channel Islands were being asked for much more documentation about their bank accounts to prove they really were resident there. That is a real practical example of a much tougher regime we are operating, he explained.

Public Accounts Committee

The Public Accounts Committee took evidence from HMRC on tax avoidance and evasion. The witness was Edward Troup, Second Permanent Secretary and Tax Assurance Commissioner, HMRC. Topics of discussion included broader lessons for banks, prosecutions and enforcement against banks.

Responding to Labour Committee Chair Margaret Hodge, Mr Troup stressed that Common Reporting Standards had “effectively breached” the principle of Swiss banking secrecy, he added, and claimed it was impossible to overstate the extent to which this restricted the ability of individuals to hide money in Swiss banks from 2018.

In response to a question from Labour MP Austin Mitchell, Mr Troup explained that HMRC tended to prosecute clients rather than banks, and refused to say how many banks might be under investigation. He offered to see if his staff could provide a figure for the number of banks and bankers under prosecution “for conspiracy to cheat the revenue”.

Mr Troup explained to the Committee that 95 per cent of banks had signed up to a code of practice that required them not to promote or practise tax evasion, but that HMRC had a “naming and shaming” mechanism for non-compliant banks coming in this year. HMRC’s report on the code of practice for the last financial year would include reports on banks that had breached it, he clarified, and would not encompass HMRC.

BIS Oral Questions

The issues of infrastructure and EU membership were discussed during BIS Oral Questions.


Mr Iain Wright (Lab: Hartlepool), Shadow Industry Minister said that a number of industry bodies support the creation of an independent body to assess the UK’s long-term infrastructure needs. He asked if the Minister will support Labour’s plan to set up an independent national infrastructure commission. George Freeman (Con), Life Sciences Minister responded:

£460 billion-worth of investment amounts to the biggest infrastructure programme since Victorian times—and it has been welcomed. As I said, the CBI’s John Cridland said that businesses in the north would be “encouraged”. We have set up the National Infrastructure Advisory Board and we do not need another commission. What we need is to continue with the progress of investments. Let me quote Simon Walker from the Institute of Directors:

“The Chancellor was right to resist the temptation of politicised giveaways, and focus instead on long-term investment in infrastructure, science and efforts”.

We are making progress

EU membership

Mr Chuka Umunna (Lab: Streatham) asked the Secretary of State if he agreed that the biggest uncertainty facing business is flirting with EU exit. Mr Cable responded:

It would indeed be disastrous if we were to leave the European Union. There would be a prolonged hiatus before the referendum was held and many options could follow it, all of which would be very damaging for employment in this country. I and my party will certainly not go along with that.

The full transcript can be read here.

Written answers

Ministers answered questions on crime statisticsFunding for Lending Scheme, cheque fraud and bank structural reform.

Key dates for the week ahead:

30 March

Purdah begins

Opposition leader Ed Miliband to give a speech on Labour’s priorities for the economy

2 April

Leaders’ debates: Party leaders take part in seven-way debate (ITV)

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This week in Brussels Fri, 27 Mar 2015 15:03:07 +0000 Read More]]> Commissioner Hill in ECON

This week Commissioner Hill exchanged views with ECON MEPs for the first time since the publication of the Capital Markets Union Green Paper, which was thus the main topic of discussion.  Lord Hill said there were great opportunities to encourage investment and growth for SMEs and infrastructure. Achieving free movement of capital across Europe, he said, is a challenge since the Treaty of Rome. This is not new. But he stressed that there is now a real need to look at “old things” with a sense of urgency. Europe needs to deliver now.

He also repeated that Capital Markets Union is complementary to Banking Union, not against it, as it is not against bank financing either. Finally, Lord Hill told MEPs that even though some legislation was going to be necessary, the Commission’s Action Plan will also consider non legislative measures. The EU cannot legislate to force people to take funding from one particular source, he said.

MEPs confirmed that they will be responding to the Commission’s Green Paper with a motion for Resolution, co-written by Burkhard Balz and ECON Chair Roberto Gualtieri. The EPP Coordinator is also in charge of a longer-term project which will take the form of an own initiative report (INI), looking back at all the past regulation on the financial system since 2008 as a cumulative impact assessment of all financial EU legislation. The report will also look forward to Capital Markets Union. This ‘looking back, looking forward’ report will not be issued before Q4.

ECON votes on Securities Financing Transactions

MEPs voted yesterday on Renato Soru’s report on Securities Financing Transactions. The report was adopted by 49 votes in favour, 2 against and 6 abstentions. MEPs also gave the Rapporteur a mandate to start negotiations with the Council which adopted its general approach in December 2014.

This piece of legislation was part of the action plan on shadow banking that the European Commission presented in September 2013. The proposal was meant to enhance transparency with new reporting obligations for such transactions as well as sanctions in case of non-compliance. The Commission’s overarching aim is to shed light on the shadow banking economy and promote a better understanding of it.

BBA delegation in Brussels

This week the BBA organised a delegation visit in Brussels, led by CEO Anthony Browne. Ten Members accompanied the BBA to different meetings with the Commission, Parliament and Council officials. We had various discussions on Capital Markets Union with the Commission which is very much on “listening mode” at the moment. They urged the industry to answer to the Green Paper as soon as possible and provide much-needed expert input. Bank Structural Reform, TTIP and Banking Union were amongst the other various topics touched upon during the day.

Key dates for the week ahead:

30 March

Joint ECON-TAXE committee meeting: exchange of views with Commissioner Moscovici

31 March

European Parliament: ECON adopts position on Benchmarks

European Parliament: ECON Public Hearing with Danièle Nouy, Chair of the Supervisory Board of the ECB

Council Working Group on Bank Structural Reform

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Forward Look Fri, 27 Mar 2015 15:00:43 +0000 Read More]]> Monday:

Purdah begins

Opposition leader Ed Miliband to give a speech on Labour’s priorities for the economy

Joint ECON-TAXE committee meeting: exchange of views with Commissioner Moscovici

Bank of England: Bankstats (Monetary & Financial Statistics) – February 2015

Bank of England: Money and Credit – February 2015


European Parliament: ECON adopts position on Benchmarks

European Parliament: ECON Public Hearing with Danièle Nouy, Chair of the Supervisory Board of the ECB

Council Working Group on Bank Structural Reform


Payment Systems Regulator becomes operational


Leaders’ debates: Party leaders take part in seven-way debate (ITV)

ECB Governing Council meets in Frankfurt


Good Friday

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BBA Brief – 27 March 2015 Fri, 27 Mar 2015 10:33:57 +0000 Read More]]> Carney – risks to UK financial system “remain elevated”

In a letter to the Chancellor, Bank of England Governor Mark Carney yesterday suggested that banks may have to bolster their funds as the Bank looks at the “calibration” of capital rules for lenders, writes the Times (£, p51). Alongside the Bank’s statement from the Financial Policy Committee, Mr Carney wrote: “In 2015, the committee will consider the buffer framework for domestic systemically important banks, including institutions other than ring-fenced banks”. The Governor also pointed to international risks to the financial system such as the slowdown in the Chinese economy and the Greek debt negotiations, which could “trigger panic in financial markets, leading to severe pain in London” (CityAM, p8). In addition, the Committee warned that liquidity may have become “more fragile” in some markets (Telegraph, B4).

Ex Ofcom chief to head review into bank trade associations

Sky News reports that former Ofcom Chief Executive Ed Richards will lead a review into bank trade associations. HSBC UK CEO Antonio Simoes has led the process of recruiting a senior independent figure, and Mr Richards is seen as an “ideal person… because of his experience as a regulator.” This follows a consultation published in January looking at potential future models of the trade association landscape in the banking industry.

MPs criticise FCA over insurance probe leak

A report by the Treasury Select Committee published today calls for a senior city figure to undertake a health check of the regulator, following an investigation into a press briefing which detailed a review of certain life assurance policies (FT, £, p2). However, CityAM (p1) notes that the report does not call for any senior resignations at the regulator.

Battle for Number 10 begins

David Cameron and Ed Miliband took part in the first leg of the party leaders’ debates last night, answering questions from an audience of Conservative, Labour and undecided voters as well as being interviewed by Jeremy Paxman. The Times (£, p8) writes that both leaders used their “differing outlooks on the economy to deflect questions on a range of subjects”. The Telegraph (p1) states that both leaders “struggled” under the “bruising power” of the former Newsnight presenter. The paper notes that the Prime Minister came out on top of a snap ICM poll by 54% to 46%, although CityAM (p3) states that the Labour leader “did better at winning over crucial undecided voters”.

Latest from the BBA

A new agreement struck by the BBA, government, regulators and consumer groups will ensure that bank customers around the country maintain access to banking services, regardless of where they live, writes BBA Policy Director Matthew Herbert.

The BBA’s Closer at hand highlights how retail banking customers in the UK can now access their money in more ways and at more locations than ever before.

Which issues should be at the forefront of managers’ minds when tackling money-laundering? Dennis Cox, CEO of strategy and risk consultants Risk Reward Limited, explains more.

Latest from our sponsor – Jaywing

Born out of the need for banks to aggregate data quickly and monitor risks accordingly, BCBS 239 comprises a set of principles that eventually all financial institutions will need to follow. Nic Orton, consultant at Jaywing, looks at the new requirements, what they cover and how banks can comply – read more here.

Today’s diary

Nationwide House Price Index

US Bureau of Economic Analysis: Q4 2014 GDP (third estimate)

Stat of the day

€7.6 billion – the amount withdrawn from bank accounts by Greek companies and households in February (FT, £, p8).

In brief

The Times (£, p43) writes that Aberdeen Asset Management CEO and second largest shareholder in Standard Chartered Martin Gilbert has called on the bank to consider moving its headquarters outside the UK, stating: “I think the theory behind that is that they don’t have any presence in the UK, so paying the [bank] levy there isn’t as useful as it is for the other banks headquartered there.”

US Federal Reserve member Charles Evans has suggested that interest rates are unlikely to be increased in June (FT, £, p9).

Bank of Ireland UK is in talks with a number of high-street businesses about joint ventures (Telegraph, B1).

The Government’s stake in Lloyds Banking Group fell below 22% yesterday as it sold a further £500 million of shares (Guardian, p37).

The Times (£, p47) reports on signs of a eurozone recovery, with Spain increasing its 2015 growth forecast from 2% to 2.8%, with France revising its public deficit to 3.8% of GDP, down from 4.1%.

The FT (£, p17) reports that RBS has agreed to sell Coutts International to the Swiss private bank Union Bancaire Privée, in a deal thought to be worth $600 million – $800 million.

What the commentators say

Writing in the FT (£, p13), Gillian Tett highlights the number of ex-bankers who are moving to the technology sector, and questions whether there are similarities between the “allure and self-confidence” of pre-2008 Wall Street and Silicon Valley.

ECI Partners managing partner David Ewing argues in CityAM (p18) that equity finance is key to growing Britain’s mid-market sector.

If you have five minutes…

In an interview with the FT (£, p10), Japan’s prime minister Shinzo Abe discusses his economic reforms.

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Anti-money laundering: the five key risks areas Thu, 26 Mar 2015 14:08:51 +0000 Read More]]> Money laundering deterrence and prevention of terrorist financing are subjects that loom large in the concerns of financial institutions and regulators. So what are the top five concerns that firms should be reacting to at present? The following five key issues need management attention:

  1. What is a crime? The lines are blurring.
  2. Who is a politically exposed person? The rules are only a minimum.
  3. The sanctions regime – it is not risk-based.
  4. Keeping money laundering deterrence training interesting.
  5. Investigation and Reporting – keeping documentation.

I will expand on each of these issues separately.

Issue 1: What is a crime?

A key issue in financial crime deterrence is identifying and defining criminal activity, since money laundering relates to disguising and using the proceeds of crime. One area that is of concern relates to taxation and the difference between what might be called tax avoidance (generally legal) and tax evasion (generally illegal).

If there has been illegal tax evasion, then the criminal has the use of funds to which they are not entitled – essentially the proceeds of crime. From the point of view of a bank when identifying the source of funds, is it really possible to identify tax evasion? The expectations on the financial institution are continuing to rise, so firms need to show extreme care. The clarity of the definition of tax evasion is becoming blurred as jurisdictions seek to take a larger share of tax revenues and look enviously at income booked in offshore financial centres. Clearly institutions will need to exercise the utmost care to ensure that they are not unwittingly guilty of assisting money laundering since the proceeds of anything deemed to be tax evasion would be considered as criminal proceeds.

Issue 2: Who is a politically exposed person?

A politically exposed person (or PEP) is normally someone who has won an election. However, any such legal definition is essentially simplistic when applied in practice. The legitimate concern is to identify those that have the ability to exceed their authority in receiving inappropriate payments, for example. However, many of these will not be individuals who have held political office, since government employees clearly might be an area for concern. Furthermore, a customer could become politically exposed subsequent to their initial acceptance of a customer by the financial institution and consequently this could not have been identified during the initial acceptance process.

The rules that a firm needs to comply with should always be seen as a minimum, not a goal. Firms need to be vigilant to the objectives and risks associated with the approach they adopt, including monitoring of existing clients.

Issue 3: The sanctions regime

The sanctions regime is designed to highlight countries, organisations, persons and companies that are subject to sanctions. It is a list which is public, but this can vary between countries. The USA, for example, may have sanctions against a country which are not shared with Europe. In other cases the sanctions are common and global.

Clearly, staff must be kept up-to-date about their obligations. While the work conducted by the firm in relation to money laundering deterrence is risk-based, compliance with the sanctions regime is an obligation and consequently is not.

Firms need to be aware not only of the sanctions regime applying in the jurisdiction where they are conducting the transaction, but also whether the transaction would breach sanctions applying in any jurisdiction where they are operating. They also need to consider whether any form of extra territorial action might be taken. This is increasingly difficult to assess, so extreme vigilance is required.

Issue 4: Keeping training interesting

Most firms know that they are required to undertake annual money laundering and terrorist financing deterrence training, together with sanctions compliance training. The problem is that this needs to be both annual and relevant to the audience.

Too many firms provide the same training every year which fails to engage with the audience effectively. It meets the regulatory minimum but not the learning objectives.

Well-designed training in this area both resonates with the issues that the audience are likely to face on a day-to-day basis and deals with their legitimate concerns while also meeting regulatory obligations. It needs proper designing and planning. It is not just about telling the team what the rules are – they could have read that. Too few firms spend sufficient time designing such training to enable their employees to gain the knowledge that they will really require.

Issue 5: Investigation and reporting

The obligation is on the firm to identify transactions and customers that may involve money laundering, terrorist financing or breaches of the sanctions regime. Many firms utilise software which incorporates a number of standardised scenarios which seek to highlight transactions warranting additional investigation. The problem is that software will tend to report too many false positives. That is; transactions that are highlighted by the scenario but upon investigation are found to not actually represent a suspicion requiring reporting to the relevant authority.

Once a transaction has been identified, the firm needs to undertake some level of investigation to see if there really is a suspicion. This needs to be clearly documented to justify the actions taken by the firm including such work as a reasonably diligent firm would have been expected to undertake. This needs to be undertaken without bias. Of course the single firm will not necessarily have the whole picture as to the inappropriate activity being conducted; much of this might be within the records of another firm. The information provided by the firm may assist the investigating agencies in getting a complete picture as to what is taking place. Accordingly, just having imperfect information is not a reason to fail to make a suspicious activity report.

Too often firms are unable to review the volume of false positives provided by their systems. This is a high risk strategy which would be hard to justify if things go wrong. If you are in such a case then I would suggest you question whether the software you are using is suitable for your purposes.

This excerpt is taken from the Handbook of Anti-Money Laundering. Click here to read more by Dennis Cox.

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Banking protocol will ensure no customer is left behind Thu, 26 Mar 2015 11:32:20 +0000 Read More]]> The way we engage with our banks is rapidly changing – but this comes as no surprise.

Millions of us have embraced a range of digital services to spend, move and manage our money. By 2014 over 14.7 million banking apps had been downloaded and customers were transferring £6.4 billion per week using internet banking – as reported in the BBA’s Way We Bank Now work.

We are also less reliant on physical bank branches to undertake our banking needs. Footfall in branches has fallen by roughly 30 per cent over the past three years. Digitisation is changing many industries across the world and banking is no different.

Banks are responding to this evolution in customer behaviour by reconfiguring their existing branch networks, while investing more heavily in innovative technology to make banking easier and more accessible for their customers. However, during this period of rapid change and innovation it is important to ensure that no one is left behind.

The Access to Banking Protocol, which was developed by the banking industry working together with the Government, the Financial Conduct Authority, and consumer groups, is a positive development which represents the industry’s commitment to support financial inclusion and access to banking.

Of particular significance, the Protocol outlines how banks will ensure that customers have suitable alternative ways to bank before a branch is closed.

Banks are also expected to undertake a pre-closure assessment, which will involve considering the potential impact on branch users and the availability of suitable alternative ways to bank. Once the decision has been made to close a branch, banks will also engage with key stakeholders to assess the impact on the local community, individual customers – including those that may be vulnerable – and small businesses.

There are nearly 10,000 bank branches open to help customers, supported by the 11,500 Post Offices where many of us can now withdraw cash, pay in cheques and use other counter services. Almost 2,300 bank branches have been refurbished in the past two years, underlining  the fact that bank branches are here to stay, it’s just that their role is changing.

Read more helpful statistics in our briefing note Closer at Hand.

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BBA Briefing – Closer at hand Thu, 26 Mar 2015 11:16:08 +0000 Read More]]>
Retail banking customers in the UK can now access their money in more ways and at more locations than ever before.

  • Customers are able to do face-to-face banking in more than 20,000 bank branches and post offices.
  • 99% of people now live within three miles of a bank branch or post office.
  • 99% of the most deprived urban communities live within a mile of a bank branch or post office.
  • Customers are transferring more than £6.4 billion every week using internet banking, with more than 7 million logins to access internet banking services.
  • Over 14 million banking apps have been downloaded with an average £1.7 billion per week being transferred using mobile apps.
  • Over 97% of all ATM cash withdrawals in the UK are made free of charge.
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BBA Brief – 26 March 2015 Thu, 26 Mar 2015 10:30:05 +0000 Read More]]> Banks and Government work to launch new branch closure protocol…

The BBC reports that the BBA, Business Secretary Vince Cable and consumer groups have today signed a protocol to ensure that if banks decide to close local branches they will consult with local communities about alternatives that could be put in place such as new ATMs or provisions through the Post Office.  BBA Executive Director Eric Leenders appeared on BBC Breakfast and BBC Five Live to discuss the deal which was also picked up in the Times (p52) and the Mail (p8).

BBA Chief Executive Anthony Browne said: “Today’s ground-breaking agreement will make sure customers still have banking services close at hand if a branch closes.  Communities will be given fair notice of any closure and clarity about the alternative places and ways to bank.  This includes the post office, which is an ideal shared service for customers who prefer to use counter services.  The agreement will also make sure there is the right support to help customers use internet or mobile banking.”

… And a new price comparison tool

The Guardian (p31) reports that the major UK banks, working with the Government and the BBA, have today launched a service called midata, which will allow people to compare different bank accounts and their charges, interest and rewards to see which would suit them best.  The service allows people to download a file containing 12 months of their transaction history from their bank’s website. Customers can then upload this to a comparison website – the first being Gocompare.  The tool will look at all the accounts on the market and present the individual with a personalised table showing how much money they could save by moving to another bank or building society account, based on their actual spending habits. Treasury Minister Andrea Leadsom said that the innovation “could transform the current account market”.

Anthony Browne said:  “This is an exciting innovation that will give customers more help when searching for the best current account for them from more than 200 on the UK market. Harnessing this data should allow some of us to pay less for our banking and others to earn more interest on their money, as well as highlighting the range of offers, such as cash-back, that are available just now. However, this is potentially valuable data so it is important to be careful who you share it with and only upload it to websites you trust.”

Bank Levy – “good politics but terrible economics”

The New York Times ran an interview with BBA Chief Economist  Richard Woolhouse responding to the declaration by the Chancellor, George Osborne, that the Bank Levy is “here to stay”.  He said: “It’s still perceived to be good politics to extract money from banks in a punitive way in spite of the fact that it is terrible economics.  The bank levy disadvantages UK-domiciled global banks competing with people not paying it, and it acts as a deterrent for activities to move to London.”

Today’s diary

Leaders’ debates: David Cameron and Ed Miliband Q&A session (Sky and Channel 4)

Bank of England: Financial Policy Committee statement from its meeting on 24 March 2015

House of Commons: BIS Oral Questions

European Financial Services Conference (Brussels)

NIESR: Possible consequences of UK exit of EU for Financial Services seminar

Latest from the BBA website

As digital firms show an interest in financial services, it’s important to strike a balance between protecting customers and ensuring stability, while not choking off innovation and competition, writes BBA Chief Executive Anthony Browne.

Watch BBA Chief Economist Richard Woolhouse discuss the latest High Street Banking Statistics.

Latest from our sponsor – Jaywing

Born out of the need for banks to aggregate data quickly and monitor risks accordingly, BCBS 239 comprises a set of principles that eventually all financial institutions will need to follow. Nic Orton, consultant at Jaywing, looks at the new requirements, what they cover and how banks can comply – read more here.

Stat of the day

$12 billion – the amount invested in the financial technology sector last year, compared to $4 billion in 2013. The FT (£, p16) quotes Julian Skan, managing director at Accenture, saying: “The obvious conclusion is that banks’ value chain is going to be disrupted”.

In brief

The BBA’s latest High Street Banking Statistics, which showed that mortgage approvals were beginning to rise again, were reported in the Times (£, p47) and the Mail (p35).

The Bank of England has been criticised over the failure of real-time gross settlement payment sytem in October last year (Times, £, p41).

European finance ministers have rejected attempts by Greece to reclaim €1.2 billion in disputed funds which Athens claims were sent back in error (Times, £, p43, FT, £, p5).

Three members of the Bank of England’s Monetary Policy Committee have played down the potential of further interest rate cuts following comments from the Bank’s chief economist Andy Haldane, last week (Guardian, p29).

RBS is set to sell off more of its US retail bank Citizens than expected after strong demand from buyers (FT).

The FT (£, p4) looks at HSBC’s decision to relocate its ring-fenced UK operations to Birmingham, noting that a number of other financial services firms, including Deutsche Bank, are creating jobs in the UK’s second city.

The Evening Standard (p42) reported that the new Payments Systems Regulator will investigate the ownership of the payments system and access to it by smaller banks.

EU Commissioner Andrus Ansip yesterday set out some of the key aims of the EU’s forthcoming Digital Single Market strategy yesterday (FT, £).

What the commentators say

In the Telegraph (B2), Ambrose Evans-Pritchard laments US economic diplomacy and its attempts to stymie the Chinese-backed Asian Infrastructure Investment Bank.

Simon Nixon warns in the Times (£, p45) that Greece has until 9 April, when it has to pay £420 million to the IMF, to produce a programme of reforms that will soothe international markets.

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Industry Protocol on Branch Closures Thu, 26 Mar 2015 00:01:45 +0000 Read More]]> The main highs street banks, consumer groups and Government have signed up to an industry-wide agreement to work with customers and communities to minimise the impact of branch closures. This agreement will make sure customers still have banking services close at hand if a branch closes. Communities will be given fair notice of any closure and clarity about the alternative places and ways to bank. The agreement also commits the industry to making sure there is the right support to help customers use internet or mobile banking.

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Digital Disruption: Prudent regulation is required for banks’ digital challengers Wed, 25 Mar 2015 17:16:31 +0000 Read More]]> Do you think we actually need banks? Bill Gates, the world’s richest man, who knows a bit about money, thinks not. “We need banking but we don’t need banks anymore” he said recently, talking about the revolution in digital technologies that can offer banking services.

In many ways, banking is inherently the most digital of industries. With financial services, it accounts for 8% of GDP in the UK, but there is virtually no physical product other than the notes that come out of ATM machines. Your bank balance is a data entry in a computer, and when you make a payment you are transferring data from one computer to another. No one really wants banks in themselves – as they might want a car or a haircut – but rather the role of banks is to help people get what they want, whether it is to buy a house, pay for a holiday or purchase tools to ply a trade. If companies other than banks can help people do what they want to do, why do we need banks?

It is not surprising that digital companies are expressing interest in financial services. Amazon has moved on from helping small business sell their goods around the world, to offering them trade finance, a role previously reserved for banks. Apple has launched Apple Pay, Google has Google Wallet, Twitter is planning Twitter Buy, and Facebook are sniffing around. Other digital firms have been set up specifically to do financial services. Paypal made its fortune by simplifying e-commerce payments; the UK’s TransferWise  was set up 4 years ago to undercut banks in foreign exchange, and is now valued at $1bn dollars (“sorry banks” runs its advertising slogan). Tech evangelists believe that crypto currencies using distributed ledgers and blockchain technology means there is no need for banks to have a central role in payments. As Jamie Diamon, the chief executive of JP Morgan put it, “the technology firms want to eat our lunch”.

The unequivocal winners of this are the consumers – competition raises standards and spurs innovation, providing better services at lower cost. But despite what Mr Gates said, it does not mean that banks are on the brink of extinction – they will always be needed for their basic functions of deposit holding and maturity transformation. But their role may change as tech firms eat into their business.

For the banks, this digital revolution is not just a threat but also an enormous opportunity, as we highlight in our report published today Digital Disruption, which was written jointly with Accenture. All banks are embracing new technologies to improve service to customers, with the most explosive being the rise in mobile phone banking, which in a couple of years has totally transformed the way we manage our money. Other innovations include Paym payments by text, biometric security and cheque imaging. But many banks are also preparing themselves of the digital revolution by rethinking the entire way they do business, with major digital transformation programmes to ensure they fully embrace the opportunities of the new technologies. Banks are recruiting senior managers from the digital world. Many are also embarking on ground-breaking partnerships with financial technology firms, knowing they need to harness their specialist expertise.

Although it is a challenge for banks, perhaps more importantly for the economy, customers and wider society, it is also a challenge for regulators and legislators.  Banking regulation has quite rightly been tightened to ensure financial stability and to prevent a repeat of misconduct, such as mis-selling or breaches of money laundering regulations. But generally, digital firms are not regulated and don’t have to abide by the same rules. The danger is that the digital revolution will simply lead to misconduct and financial instability exploding outside the regulated banking sector in the unregulated digital sector.

If you think this won’t happen, consider the salutary story of pay day lenders. High risk, high interest, short term lenders have existed since biblical times, but when they operated manually going door to door their scale was small. Banks are basically prevented from this market because they are quite rightly only allowed to lend to people they have checked can repay the loan. Payday lenders such as Wonga were essentially highly innovative digital start-ups, which embraced the internet and data mining, but were unconstrained by banking regulation. It was an explosive mixture, and tens of thousands of people ended up in high-debt misery. Politicians complained, the pay day lenders were brought under the Financial Conduct Authority, and 90 per cent went out of business. My challenge to regulators and policymakers is to learn the lesson from this. Other challenges coming down the line include virtual currencies, which offer many benefits, but are not controlled by the same anti-money laundering and counter terrorism-financing as banks, which is why they are proving so attractive to organised criminals who want to hide from law enforcement authorities. Our new payments regulator, the Payments Systems Regulator, comes into force next month, but has raised eyebrows in the industry by regulating banks, but not regulating digital payments providers such as PayPal. Digital firms offering trade finance are not subject to the same anti-money laundering controls as banks. Digital companies offering loans are not subject to the same prudential regulation as banks, but could still impact financial stability.

To protect customers, thwart organised criminals, and ensure financial stability, prudential and conduct regulators, and legislators, need to ensure that regulation is future-proofed for the digital age. The focus needs to be on regulating activities – such as payments and lending – rather than only thinking about regulating only some categories of institutions that offer them. The balance needs to be struck to ensure we protect customers and ensure stability, while not choking off innovation and competition. Only then can we be sure that the digital revolution sweeping financial services lives up to its ultimate promise.

This article appeared in the Daily Telegraph on 24 March 2015.
Digital Disruption was jointly written by the BBA and Accenture.

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