We need watchdog to keep banking behaviour in check, says George Osborne The Chancellor defended the Government's banking reforms but admitted more needed to be done to monitor the industry and suggested replicating systems used in teaching and medicine to keep standards high. Appearing before the Parliamentary Commission on Banking Standards, Mr Osborne urged MPs not to unpick the Government's "ground-breaking legislation," influenced by proposals drawn up by Sir John Vickers. Sir John and his colleagues on the Independent Commission on Banking last year recommended that UK banks ring-fence their high street or retail arms from high-risk investment divisions. Mr Osborne previously said the reforms would be fully implemented by 2019. The Chancellor said today: "I would be very wary of unpicking a consensus that has been arrived at. We have spent two years getting to this point. He added: "I would point out this is one part of the answer but I think it is the right structural change. It's not the only thing that needs to change and I hope this Commission would look at other issues, like the standards we expect of the profession and how, for example in the medical profession and the teaching profession, we expect certain standards and those standards are administered by the profession often, but how we can create something similar in the banking industry. Mr Osborne warned the Commission of the consequences of seeking to rewrite the Financial Services (Banking Reform) Bill so close to its passage through Parliament. "You will be unpicking of a consensus that has been established over the last two years," said the Chancellor. You will be unpicking the work that John Vickers and his commissioners did. That work has been accepted, as far as I'm aware, by all the major political parties. We are now on the verge of getting on with it. If you come back and tell me 'This entire approach is wrong, we should have a completely different approach', you are well within your rights but the consequences of that will be either you will carry the day, in which case we will have start all over again with a new piece of legislation, or you won't carry the day. Commission members bridled at the suggestion that Mr Osborne was seeking to limit their inquiry. Labour MP Pat McFadden told the Chancellor: "If you are worrying about the freedom and powers of the Commission, perhaps you should have thought about that before establishing it... If you were sitting on this side of the table, you wouldn't take too kindly to a Chancellor saying 'I want you to look at that, but not to look at that'. And Commission chairman Andrew Tyrie said the members did not find it "very convincing to be told that we should be wary of unpicking a consensus." Just because something has achieved a consensus does not necessarily mean that it is right. It is our job to take a look at it," said Mr Tyrie. Mr Osborne assured the hearing that he was "very supportive" of the Commission's work, but said he did not see it as the best use of their inquiry to become involved in pre-legislative scrutiny of his Bill, which was already being looked at by three parliamentary committees. Mr McFadden raised concerns that regulators may find it impossible to enforce the ring-fence envisaged by the legislation between the High Street and "casino" arms of big banks, because the details of how the ring-fence will work are not spelled out in the Bill itself. But Mr Osborne said the details of how high and how impermeable the ring-fence should be - including measures to separate the different arms' governance, risk management, remuneration structures, human resources, capital and liquidity - will be included in secondary legislation, to be published by the time the Bill reaches the committee stage in the House of Commons. This would give future chancellors flexibility to adapt the ring-fence to suit developing circumstances, he said, adding: "If we prescribe all of these things in detail in primary legislation, I have no doubt that in 10 to 15 years' time, some clever legal firm will have found some way to get round it." But Mr McFadden said: "We have a problem which has been put to us by regulators... They said they are not sure they have a mandate to ensure this degree of separation. What is your response to the regulators' fear that they don't have the mandate to put this into practice because it is not in the Bill? Mr Osborne insisted that the regulators will have the necessary mandate. But Mr Tyrie said the Commission was not happy that details of the scheme were still not known. He told Mr Osborne and Financial Treasury to the Secretary Greg Clark: "We want more than reassurance, we want more than a blank sheet. We want more than we are getting now. You are both honourable men and we are grateful for your assurances, but we are hopeful that we can rely on more than those before we have done with this process. Mr Osborne said the primary purpose of the legislation was to ensure that, in a future crisis, a Chancellor is able to allow a bank to fail while protecting consumers, rather than being forced to bail it out, as his predecessor Alistair Darling was because of the "inadequate" legislation in place at the time of the 2007-8 banking crash. "Ultimately, what this is all about is so that the person doing my job - hopefully not on my watch - when faced at midnight with that decision 'Do you let this very large bank go bust?' has enough confidence to say 'I think we can let it go because the banking Bill has provided me with enough reassurance that we can continue to provide core services, that people can go to cashpoints and get their money out'," said Mr Osborne. My predecessor, when he was faced with that decision, felt he was not confident that people would be able to get their money out of the cashpoint in the morning. If, at the end of all this, the person doing my job is still not confident that people can get their cash out of the cashpoint even if they let the institution fail, then I think we as a Parliament will have failed. It was revealed today that the Commission will miss its deadline of December 18 for producing its final legislative recommendations. In an exchange of letters, Mr Osborne warned that any delay in completing the Commission's scrutiny of his draft Bill could "seriously jeopardise" the Government's commitment to delivering its reforms. But Mr Tyrie told the Chancellor that he was now aiming to produce an interim report in December and a full report as soon as possible in the new year. Just days after the publication of the draft Banking Reform Bill last month, Mr Tyrie wrote to Mr Osborne: "The original intention to include all proposed legislative action in our initial report will no longer be possible in the light of the pre-legislative scrutiny work that we will be undertaking. Recommendations for legislative action may well be contained in our final report next year... The Commission has asked me to obtain assurances from you that a means of legislating will be available to give statutory effect to recommendations for legislative action made in the new year. Mr Osborne responded: "It is vital that I introduce primary legislation into Parliament early in the new year. I take seriously the scrutiny process you are undertaking and I wish to do justice to your report by having time to consider it fully. It is therefore absolutely essential that you report on that scrutiny by December 18 as per the orders establishing your Commission. Any delay would seriously jeopardise the coalition Government's clear commitment to deliver these important reforms. Any further work you do, for example on corporate governance, that requires legislative changes needs to be published as early as possible in the new year... The sooner we have your final report after the new year, the more likely we are to take on board its conclusions. In a reply on October 24, Mr Tyrie said: "The Commission will aim to produce both an interim report in December and a final report as soon as possible in the new year." Mr McFadden told the Chancellor he was asking MPs to "write a blank cheque" because there are too many gaps in the legislation which would allow banks to find ways round the ring-fencing rules. "This leaves a situation down the road where we are asked to approve an enabling Bill in Parliament where much of the capacity to implement it is given to a regulator and the banks, with their huge resources, their record of picking away at things, can start to burrow under, as the regulator fears, this ring fence," the Labour MP said. The policy problem here is that you are leaving the regulator at the mercy of the banks. Mr Osborne admitted that banks would attempt to find ways round the reforms but insisted the legislation would give regulators enough power to tackle the problem. We are creating an incredibly powerful regulator. We are putting the Bank of England in charge of regulation," he told the committee. The Chancellor insisted the Bank of England was powerful enough to withstand industry lobbying and would be backed up in law when secondary legislation was taken through Parliament. The industry, by its very nature because it is a free market and there are lots of actors in it, not all of who adhere to the highest standards, will seek ways to get rounds the rules. That has always been the case and will probably always be the case. Mr Osborne said that was why he was creating reforms which would "stand the test of time" instead of legislation that was "absolutely right for 2012" but could soon by bypassed. We have got to give ourselves as a Parliament the flexibility to give the regulator the weapons they need. The Chancellor told the Commission there were not enough banks for customers to choose from in the UK. We don't have a huge number banks, sadly, large banks. I would like to see many more.