Nick Clegg and Vince Cable are leading a push to reopen talks on UK banking reforms in a move that could stoke coalition tensions.
The Liberal Democrat deputy prime minister and business secretary want to re-examine whether banks’ retail operations should be allowed to market complex derivative products, in an effort to avoid the mis-selling scandals that have recently engulfed several lenders.
Sir John Vickers recommended banning banks’ retail operations from selling interest rate and currency swaps in his report on industry reform, issued last September, but ministers rejected it after heavy City lobbying.
Mr Clegg and Mr Cable want to begin talks on whether to reverse that decision. Their change of heart has been triggered by controversies about standards at British banks, especially the revelation that up to 11 banks mis-sold interest rate swaps to businesses that did not understand the risks.
“We originally decided to allow banks not to separate out derivatives such as this, but now circumstances have changed in the light of three recent major banking scandals,” one senior Lib Dem told the Financial Times. “This is at an early stage, but we want to open up a wider debate on banking reform, and this would be part of that.”
The move could irritate George Osborne, the chancellor, who thought he had coalition support for a June white paper on banking reform measures that did not include Sir John’s proposed separation of retail banking and derivative selling.
The reforms are still open to debate, however, and will not make it into legislation for some time.
A Treasury spokesman said: “Vince and George have worked very well together on banking reform so far. But as far as we’re concerned, the reasons for allowing products such as these inside the ringfence remain the same as they were when we published the white paper.”
Another official said: “Those products are part of the bread and butter of high street banking.”
The banking industry believed that it had won an important victory by convincing ministers to water down this aspect of the Vickers report. Banks argue that forcing them to sell swaps separately from their ringfenced retail operations would increase operational costs.
The industry also argued that the products were essential to the daily banking of many businesses. Companies that do business in a foreign currency, for example, may rely on currency swaps to guard against potential exchange rate losses.
Whitehall aides pointed out the white paper was still open to further changes before becoming legislation some time before the end of the parliament in 2015. This could give the Lib Dem leadership more than a year to persuade Mr Osborne to change his mind.
Some in government are concerned that making it easier and cheaper to sell complex products would give banks an incentive to push them aggressively on to businesses that do not want or need them.
Four of Britain’s biggest banks agreed in June to compensate small and medium-sized businesses that had purchased interest rate swaps after the Financial Services Authority found the lenders guilty of “a range of poor sales practices”. Another seven banks have said they will review their own sales practices.