PLC Global Finance update for March 2011: United Kingdom
The United Kingdom update for March 2011 for the PLC Global Finance multi-jurisdictional monthly e-mail.
Independent Commission on banking: the UK approach to Glass-Steagall
The US Banking Act of 1933 established the Federal Deposit Insurance Corporation and introduced banking reforms, notably the prohibition on a bank holding company from owning other financial institutions. The common name of the Act was the Glass-Steagall Act, after its legislative sponsors, Carter Glass and Henry B Steagall. The Act was repealed in 1999 and effectively removed the separation that previously existed between Wall Street investment banks and traditional deposit taking banks.
Following the recent financial crisis, the debate concerning Glass-Steagall legislation has surfaced once again. In the UK the Chancellor of the Exchequer announced in June 2010 the creation of an Independent Commission on Banking, chaired by Sir John Vickers. The Commission is expected to present a final report in September this year which will set out a number of policy recommendations concerning structural measures to reform the UK banking system, including the complex and controversial issue of separating retail and investment banking functions.
On 24 September 2010, the Commission published a call for evidence on issues relating to the structure of the UK banking sector. In January, the Commission published the responses to the call which showed that respondents were divided over whether retail and investment banking should be split. Some respondents favoured a split because they felt that the "too big to fail" guarantee of universal banks distorted the market; whilst others favoured a split because they felt that there should be separation of risk and reward for universal bank employees risking shareholder capital, which did not exist with the funding subsidy provided by retail deposits. However, some respondents argued against a split, for a variety of reasons including the impact on businesses needing access to a range of complex financial products as well as more basic services.
Also in January, Sir John Vickers gave a speech in which he discussed the Commission's work and the broader question of whether, and if so how, structural reforms might relate to other reform initiatives, especially those to enhance banks' capital structures and the credibility of their recovery and resolution plans to cope with crisis. Interestingly, in his concluding remarks Sir John said: “The observation is that, if forms of separation were thought desirable in terms of public policy, there would be the further question of whether they should be required of the institutions concerned, or incentivised, for example by appropriately different capital requirements for different business models. Riskier structures need deeper foundations."
The Commission held its latest meeting on 8 March and has confirmed that it will now publish an interim report on 11 April. The interim report will provide a useful steer as to what recommendations the Commission will make in its final report. Many are sceptical and feel that a Glass-Steagall type Act will not be recommended and even if it is it is doubtful that the government will push through such legislation. However, as Sir John Vickers noted in his speech, if such legislation is advocated it needs to be thought through particularly in terms of capital structures.
Financial Transactions Tax
In a move designed to put pressure on the European Commission to push ahead with its proposals for taxing the financial sector, the European Parliament has approved a non-legislative resolution in favour of a report which recommends the introduction of an EU Financial Transaction Tax (FTT).
The Commission itself has been working on ideas for taxing the finance sector. In October 2010, it published a Communication on the viability of an FTT and a financial activities tax (FAT) (See European Commission proposals for taxing the financial sector). At the end of February 2011, the Commission launched a consultation on financial sector taxation, seeking views on the impact and feasibility of various policy options in this area, the potential design of the tax and possible problems.
MEPs were voting on an "own-initiative" report by Greek Socialist MEP, Anni Podimata. The report proposes an FTT in addition to bank levies and FAT. The report suggests a rate of between 0.01% and 0.05%, on a broad tax base covering every type of financial transaction. The estimated revenue potential of the FTT at a rate of 0.05% would yield nearly EUR200 billion per year at EU level and US$650 billion at global level.
The report states that the tax should have the broadest base possible to ensure there is a level playing field in the financial markets. It suggests that the tax could be graded, to create positive incentives to move financial transactions away from over-the-counter trading to more transparent and regulated venues. The intention is that the FTT will help curb speculation and tackle short-term and automated high-frequency trade transactions which are seen to be highly damaging. It is hoped that the tax will improve market efficiency, increase transparency, reduce excessive price volatility and create incentives for the financial sector to make long-term investments. The report calls for an impact assessment on the feasibility of a FTT to be presented as soon as possible, with the intention that it constitute the first step towards legislative proposals.
The Commission was quick to distance itself from the Strasbourg vote. Algirdas Semeta, EU Taxation Commissioner, said the idea of pursuing such a tax at EU-level only was "premature" and he believed such a tax was necessary at a global level. "In fact, taking into account the potential impact that this could have on European competitiveness, it would be irresponsible to proceed with such a tax without first analysing and fully understanding all the implications". Commission officials are due to publish their conclusions on the various options for taxing the financial sector by the summer.
Although the MEPs' vote has no legislative effect, and the European Commission would need agreement from all member states before proceeding with a tax policy, nonetheless a symbolic vote of 529 to 127 piles pressure on Brussels to look more closely at the FTT, when the Commission begins negotiations for the next EU budget later this year.
ECJ signals the end of gender-based insurance premiums
On 1 March 2011, the ECJ handed down judgment in Association Belge des Consommateurs Test-Achats ASBL and others case (Case C-236/09). The ECJ followed the Advocate General's Opinion and ruled that gender-based pricing in insurance contracts is unlawful. The ruling will have a fundamental impact on the insurance industry in the EU, including the cost of purchasing pension annuities, where differential pricing between men and women based on actuarial factors is widespread. A transitional period will apply, so that gender-based pricing will be invalid from 21 December 2012.
The consumer association argued that Belgian national law implementing the Gender Directive was incompatible with the principle of equal treatment for men and women. The ECJ agreed that allowing differences in insurance contracts linked to the gender of the insured was unlawful. It found that reliance by insurers on actuarial statistics associated with gender amounted to discrimination and was therefore incompatible with the fundamental principle of equal treatment. The ruling of the ECJ is final and there is no possibility of further appeal.
Impact of the ruling
Differences in premiums and benefits in insurance contracts which are based on gender will no longer be lawful, and unisex premiums will apply, from 21 December 2012. Although occupational pension schemes were not mentioned expressly, the decision is likely to have a significant impact on the pensions industry, with annuity rates for men falling into line with those for women. The shorter transitional period than that recommended by the Advocate General means that insurers should review their policies and practices without delay. Insurers may need to use uncertainty premiums until they have sufficient data on issuing policies on the new basis. This could result in higher premiums or lower benefits for certain policyholders (female motorists and male annuitants being the obvious examples), with insurance generally becoming more expensive, due to stricter underwriting tests.