Lacking radicalism, bank reform proposals look like good news for banks and advisers

Officially, the Vickers report on UK banking reform was met with the cold shoulder by City lawyers last week but, in many ways, the initial proposals seemed an ideal outcome for banking advisers.

The Independent Commission on Banking (ICB) was set up by the coalition Government last year to examine reforms to reduce systemic risk in the banking system and "to investigate the complex issue of separating retail and investment banking in a sustainable way". Despite being billed as considering radical steps to tackle the excesses of banking, the ICB's initial recommendations were widely viewed as modest, leading the share price of a number of large UK banks to rise on the day of their announcement on 11 April.

The report only suggests a lighter "ring-fencing" between retail and investment banking, which lawyers argue will be more costly than effective. Other recommendations are for banks to raise their core capital to 10% (against international standards of 7%) and for Lloyds Banking Group to be forced to sell off more of its branches than currently planned to increase competition on the high street.

And, no, the report does not come up with a practical solution as to how to avoid a financial crisis as a result of a bank failure, nor does it suggest anything particularly revolutionary. But in many ways the commission was undertaking a thankless task – with so little will emerging at other major finance centres to punish banks, coming up with radical proposals that could be practically implemented without seriously damaging the City was never going to be easy. Added to which, it was genuinely hard to argue with the critics that there was little link between the universal banking model and financial instability during the banking crisis.

As such, proposals that look likely to lead to relatively modest structural tinkering without being enough to seriously undermine the City would appear to be more good news for finance lawyers who are already in line to benefit from a stream of work linked to new regulatory frameworks in the UK and Europe and the efforts by banks to recapitalise themselves under Basel III standards.

In the wider world, the report will probably fail to make either the banks or their many critics that happy, but will avoid open revolt on either side of the debate. Clifford Chance regulation partner Simon Gleeson (pictured) says: "This is a strawman that they have put up, but it's a rather flimsy strawman. I think what the Government will conclude is that they looked at these issues because they were asked to, but that a lot of it is not viable to implement."

Allen & Overy regulation partner Bob Penn takes a similar view: "The paper presents a very British compromise between the needs of stability and international competitiveness."

In addition, one should remember that this is only an interim report, which is to be consulted on until the summer – a consultation where the banks will have a strong voice – with the final results not unveiled until September. And there has been little indication so far that the Government intends to take an aggressive stance in dealing with banks. Understandably, the expectation from advisers is that a lot of this even fairly modest reform is unlikely to be implemented. By September, if the coalition is lucky, the political pressure will be easing, if current events turn attention in other directions.

A royal wedding, anyone?