Policy paper

2010 to 2015 government policy: bank regulation

Updated 8 May 2015

This is a copy of a document that stated a policy of the 2010 to 2015 Conservative and Liberal Democrat coalition government. The previous URL of this page was https://www.gov.uk/government/policies/creating-stronger-and-safer-banks. Current policies can be found at the GOV.UK policies list.


We have introduced the biggest reforms to the banking sector in a generation: to make banks more resilient to shocks, easier to fix when they get into difficulties, and to reduce the severity of future financial crises.

We want to make sure that when banks make losses, retail customers aren’t excessively affected and taxpayers’ money isn’t used to bail banks out.


The Banking Reform Act received Royal Assent in December 2013. It will bring into law structural and cultural changes to the banking system, by:

  • introducing a ‘ring-fence’ around the deposits of people and small businesses, to separate the high street from the trading floor and protect taxpayers when things go wrong
  • making sure the new Prudential Regulation Authority can hold banks to account for the way they separate their retail and investment activities, giving it powers to enforce the full separation of individual banks
  • imposing higher standards of conduct on the banking industry by introducing a criminal sanction for reckless misconduct that leads to bank failure
  • giving depositors, protected under the Financial Services Compensation Scheme, preference if a bank enters insolvency
  • giving the government power to ensure that banks are more able to absorb losses
  • introducing a cap on payday loans

To make the financial system more responsive to consumers, we are:

  • increasing competition between financial services firms, including making it easier for customers to switch their current accounts with a 7-day current account switching service introduced in September 2013

We are also:

  • managing the government’s shareholding in certain UK banks
  • working with other countries to respond to financial risks to the global economy
  • reforming the way interest rates are set for loans between banks (known as the London Interbank Offered Rate (LIBOR))
  • working internationally to make sure higher regulatory standards are applied to banks


We published a White Paper in 2012, ‘Banking reform: delivering stability and supporting a sustainable economy’ which set out our proposals for reform of the banking sector, based on the Independent Commission on Banking’s recommendations.

The consultation on the white paper closed in September 2012, and we used the responses to help develop the draft Banking Reform Bill ‘Sound banking: delivering reform’. The draft legislation was scrutinised by the Parliamentary Commission on Banking Standards (PCBS) and the government has made a series of amendments to the Bill based on their recommendations.

The government’s response to the PCBS, and the impact assessment, are contained within ‘Banking Reform: a new structure for stability and growth’, published alongside the Bill as introduced into Parliament in February 2013. The Bill is currently going through Parliament.

On 17 July 2013 the government published the consultation document Banking reform: draft secondary legislation, which sets out draft secondary legislation proposed under the Bill. The consultation closed on 9 October 2013 and the government published a summary of responses on 18 December 2013.

Parliamentary Commission on Banking Standards

The Parliamentary Commission on Banking Standards (PCBS), a joint parliamentary committee led by Andrew Tyrie MP was appointed on 17 July 2012, to consider and report on:

  • professional standards and culture of the UK banking sector, taking account of regulatory and competition investigations into the LIBOR rate-setting process
  • lessons to be learned about corporate governance, transparency and conflicts of interest, and their implications for regulation and for government policy
  • to make recommendations for legislative and other action

On 19 June 2013, the Commission, released its fifth and final report, ‘Changing banking for good’. The report focused on individual accountability, corporate governance, competition and long term financial stability.

The government responded to this report on the 8 July 2013 and strongly endorses the Commission’s principal findings and intends to implement its main recommendations.

Independent Commission on Banking

We set up an Independent Commission on Banking in June 2010, chaired by Sir John Vickers. The commission’s role was to review and make recommendations on the structure of the banking system and on how we could reform it to increase competition and maintain financial stability.

The commission published an issues paper in September 2010, an interim report in April 2011 and its final report in September 2011.

In June 2011, the Chancellor announced his support for the commission’s proposals on separating high street banks from investment banks and making sure that investors rather than the public pay to cover investment banks’ losses.

The government responded to the commission’s final report in December 2011.

Financial Services Act

Alongside these reforms, the Financial Services Act, which came into force on 1 April 2013, makes fundamental changes to the way that financial services firms likes banks are regulated. Find out more about how we are improving the regulation of the financial sector to protect consumers and the economy.

Appendix 1: working with other countries to respond to financial risks to the global economy

This was a supporting detail page of the main policy document.

To safeguard financial stability and make it less likely that large financial institutions will collapse in the future, they need to build up enough high quality capital to cover their own losses and make sure that they are not at risk of insolvency. As it won’t always be possible to prevent institutions from failing, it is also necessary to have agreed principles and steps in place that will allow for timely and orderly resolution that does not unduly affect country economies. Given that large banks and other financial institutions operate globally, we need to work with other countries and international organisations to agree an international approach to this issue.

We’re taking part in international discussions within the EU, the G20 and the Financial Stability Board (FSB) about how we can respond more effectively to financial risks in the global economy.

We will support reforms to the way the financial sector is regulated that will:

  • make the global financial system more resilient which in turn will help ensure the UK remains a world class financial centre
  • coordinate standards internationally so that companies cannot exploit differences between different countries’ regulations
  • make markets more stable and transparent so that they function more effectively and reduce the risk of contagion spreading across the financial system
  • protect taxpayers by managing crises more effectively and removing the need for government support from the financial sector
  • Protect the unity and integrity of the Single Market for financial services in the EU

These discussions have already led to a number of international agreements to reform global financial regulation, many of which have been agreed by the G20. These include commitments on enhanced prudential requirements (Basel III standards), principles on resolution of financial institutions (FSB’s Key Attributes), and financial market transactions (Over-The-Counter derivatives). These are now being implemented at regional and national levels.

In the EU, a European System of Financial Supervision has been created as part of the new structure of EU supervision of financial services. Many other reforms to EU financial regulation are currently in progress.

Appendix 2: managing and concluding the government’s shareholdings in certain UK banks

This was a supporting detail page of the main policy document.

We continue to have shareholdings in certain UK banks (see below). We manage these shareholdings through a government-owned company, UK Financial Investments (UKFI).

UKFI is responsible for developing and managing a strategy for selling the government’s shares in Royal Bank of Scotland and the Lloyds Bank Group. The Chancellor of the Exchequer makes final decisions on the sale of shares.

In June 2013, during his annual Mansion House speech the Chancellor announced that the government is starting to plan for the exit of its shareholdings in Lloyds and RBS.

He set out three objectives for the banks to be guided by, these are:

  1. maximize the ability of them to support the British economy
  2. get the best value for money for the taxpayer
  3. do what we can to return them to private ownership

In September 2013 the government began the process of returning Lloyds to the private sector, when it sold 6 per cent of the shares in the bank, at 75p per share.

In March 2014 the government sold another part of its shares in Lloyds, decreasing its overall shareholding to 24.9 per cent. Then in December 2014 the government announced that it is selling part of its remaining shareholding in Lloyds through a trading plan.

For subsequent disposals the government will consider all options, including a potential retail offering to the general public.

In November 2013 RBS committed to a new direction that will help it boost the British economy rather than burdening it. This is part of the government’s plan for sustaining the economic recovery and creating a banking system that works for Britain. Under this new direction, a bad bank will be created to separate and wind down RBS’s poorly-performing and high-risk assets that are a legacy of what went wrong in its past, enabling RBS to look to the future. But instead of an ‘external’ bad bank that would require more taxpayers’ support, this will be an ‘internal’ bad bank funded by RBS itself.

The publication of RBS’s new direction and announcement of an internal bad bank follows the conclusion of the government’s review, announced by the Chancellor in June, into the case for a so-called bad bank to hold and manage RBS’s legacy assets and what the different options may be.

In January 2012, UKFI managed the sale of the government’s shares in Northern Rock.

Bradford and Bingley and Northern Rock Asset Management, remain wholly owned by the government and are now managed by UK Asset Resolution (UKAR). The government holds 100% of the shares in UKAR, which is managed on a commercial and arm’s length basis by UKFI.

The eventual cost of the support the government provided to the financial sector will depend on a number of factors, including the eventual sale price achieved for the shares in Royal Bank of Scotland and Lloyds Banking Group. The Office for Budget Responsibility (OBR) is responsible for producing the official estimate of the final net cost to the taxpayer. Its latest estimate, contained in the March Economic and Fiscal Outlook 2013, was an expected net loss to the taxpayer of £19.8 billion.

Appendix 3: reforming the way interest rates are set for loans between banks (known as LIBOR)

This was a supporting detail page of the main policy document.

Following the findings by various authorities in regard to the attempted manipulation of the London Inter-Bank Offered Rate (LIBOR), the Chancellor of the Exchequer commissioned Martin Wheatley, Chief Executive of the Financial Conduct Authority, to carry out a review of LIBOR.

The review looked at the structure and governance of LIBOR, and in September 2012 it published a report with recommendations on how the system should be reformed. We fully endorsed every one of the Wheatley Review’s recommendations and urged all institutions involved in the process of setting LIBOR to implement them.

In particular we introduced amendments to the Financial Services Act to make the manipulation of LIBOR a criminal offence and to bring LIBOR within the scope of regulation, so that financial regulators can oversee the way it operates. The new rules took effect from April 2013.

The Wheatley Review recommended that a new LIBOR administrator should be found. The Hogg Tendering Advisory Committee for LIBOR, chaired by Baroness Hogg managed the tendering process to find the new administrator. On 9 July 2013, the Hogg Tendering Advisory Committee for LIBOR announced that the British Bankers’ Association (BBA) accepted its recommendation that NYSE Euronext (renamed ICE Benchmark Administration after an acquisition by the IntercontinentalExchange (ICE) Group in November 2013), should be the new LIBOR administrator.

ICE Benchmark Administration started administrating LIBOR in February 2014.

We are also working in the EU on the reform of benchmarks more broadly (including LIBOR and the Euro Interbank Offered Rate (EURIBOR)), to restore confidence in indices used by the market.

LIBOR fines

Since June 2012, HMT has received LIBOR fines from the Financial Conduct Authority (FCA). The Chancellor chose to use the fines in support of good causes. To date, the FCA has imposed total fines in excess of £450m relating to its investigations of LIBOR manipulation. This policy reflects that those who have paid fines in our financial sector because they demonstrated the very worst of British values are paying to support those in our Armed Forces and emergency services who demonstrate the very best of British values.

We are working with other government departments and charities to ensure that all LIBOR fines received to date will be committed within the life of this Parliament.