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Banking reforms debated in Parliament following LIBOR and interest rate swap scandals

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The Banking Reform Bill is being debated in Parliament today. The Bill was implemented in the wake of the LIBOR rigging scandal and the interest rate swap (IRS) mis-selling which has affected thousands of businesses in the UK.

LIBOR rate rigging relates to artificially altering the key interbank lending rate, a practice that made banks appear more secure during the financial crisis.

In terms of business-lending, fixing the rate in this way could have had an effect on Interest Rate Swap products, of which there are estimated to be in the region of 28,000 sold to thousands of small businesses.

These IRS schemes, which installed a lower and higher cap on interest rates, were sold by a variety of banks from 2001 onwards to encourage businesses to protect themselves against rate rises. If the rate rose above the cap, the business would be protected from extra charges and the bank would refund the customer the increase in the interest above this rate.

However, it appears the banks have been failing to notify business borrowers that the reverse is also true. With interest rates at an all-time low, customers are paying banks the excess since the rates have gone below the lower cap amounts agreed in many of the IRS deals.

Large-scale scandals such as these have prompted the current reforms to the banking sector being debated today in Parliament.

So what does the Banking Reform Bill actually propose?

  • Ring-fencing of high street activities undertaken by UK banks away from the riskier investment banking;
  • Regulators will be given the power to split up a bank if it deems that they are undermining the ring-fencing. An annual review will be conducted of the entire UK banking industry;
  • The Financial Services Compensation Scheme guarantees up to £85,000 of every deposit into a UK bank. Under the reforms, if a bank were to go bust, this would be paid out before any other money owed by the bank;
  • The Treasurer could impose tougher requirements on banks to absorb losses, such as requiring a bank to borrow from markets in a form that allows the bank to impose potential losses on the lender.

By commercial litigation solicitor, Leanne Millhouse