By Max Clarke

The Independent Commission on Banking this morning published its Interim Report outlining several recommendations to help promote financial stability and competition among Britain’s high street banks.

To be published in its entirety in September 2011, the report is being chaired by leading economist Sir John Vickers.

Evaluating the issues outlined in today’s interim report is Jonathon Herbst, partner in the financial services regulation team at Norton Rose LLP:

“The Review's solution of subsidiarisation is clear but leaves a lot of questions to be answered. In particular, the practical issues relating to provision of group services and living wills will need a lot of detailed thought. The decision not to go the whole way to require the splitting up the banks is welcome but this half way house will only succeed if it is workable and does not leave the UK at a competitive disadvantage globally. The jury is still out on this".

“On the retail banking deposit issue, there is already enormous pressure to get better returns for investors. Going further and limiting in a mandatory way the asset side of the balance sheet in relation to lending would be politically controversial. The end point of this may be to make the whole business of making retail deposits fundamentally unattractive. Unless this is properly thought through, this could lead to the opposite of the wider banking access which is a key element of Coalition thinking."

The Interim Report discusses certain initiatives (beyond the continued application of general competition and merger law) that could improve competition. In particular the Independent Commission regards the Government’s proposals for a Financial Conduct Authority (FCA) as a potentially vital spur to competition in banking. This is on the basis that the FCA will have a clear primary duty to promote effective competition and have at its disposal regulatory tools that are not available to the general competition and consumer authorities.

The Independent Commission’s current view is that the reforms of the kind contemplated in the Interim Report would support the competitiveness of the economy and would be likely to have a broad neutral effect on financial services.