September 20, 2011 5:42 pm
Don’t listen to the lobbyists: they never goaway
By John Kay
The revelations of large losses at UBS last week could not have been better timed toreinforce the case for ringfencing retail banking. Kweku Adoboli’s activities apparently involved implementation of arbitrage strategies to replicate the liabilities of syntheticexchange traded funds. Whatever the profitability of these transactions, they shouldnot be underwritten by
depositors or Swiss taxpayers.But effective ringfencing depends on effective implementation of its detail. Retail banks’ exposure to other financial institutions must be severely constrained;derivative transactions must be limited to those necessary for everyday banking; retail banks can no longer be allowed to cast their treasury operations as profit centres witha distressing tendency to become loss centres. Retail banks’ boards must besufficiently independent to support a culture very different from the one in which Mr Adoboli operated.The proposals of the Independent Commission on Banking would allow up to eight years to implement this in the UK. This is too long. Not just because it is a long timeto wait. The graver concern is that reform phased in over an extended period will not be effectively implemented at all.The commission has finished its work, and will be dissolved. As evidence andargument have been developed, informed public opinion has become more and moresupportive of its proposals. The commission’s members and staff will now turn toother activities and commentary will focus on other issues. But lobbyists never goaway. Public opinion, well briefed and properly marshalled, is a decisive force inpublic policy. But since there are many issues in public debate, attention to any one isnecessarily transient. The attention of vested interests to their own concerns,however, is permanent.On the same day the banking report was published, the European Union’s Council of Ministers approved a proposal to extend the term of copyright in sound recordingsfrom 50 to 70 years. Every independent assessment – including a reportcommissioned from this paper’s former editor, Andrew Gowers, and another review on the implications of intellectual property for economic growth, provided by IanHargreaves only this spring – has reached the same conclusion. The cost of suchextension to the public far exceeds any benefit.