Out-Law / Your Daily Need-To-Know

‘Ring fenced’ UK retail banks will be able to offer some trade finance products to business customers

30 Jun 2014, 2:56 pm

UK retail banks subject to the new ‘ring fence’ separating them from the same firm’s riskier investment banking activities will be able to offer business customers some more complex products, according to final legislative proposals published by the government.

As part of the Banking Reform Act, banks will be required to separate retail banking activities from the risker investment and trading activities of the wider banking group. Under the government’s original proposals, retail banks would have been able to offer some simple derivative products to small business customers. Following lobbying from business bodies, including the Confederation of British Industry (CBI), they will now also be able to offer simple options allowing small companies to hedge certain risks within the ring fence.

Matthew Fell, the CBI’s director for competitive markets, described the changes as “an important step to ensuring banks can continue to serve medium-sized businesses as they grow and expand into new markets”.

“Businesses want a financial system that is both stable and able to provide the full suite of products and services it needs to grow sustainably,” he said. “The government’s decision on what products to include within the ring fence strikes a sensible balance between these two objectives.”

“Trade finance has a crucial role to play if businesses are to meet the prime minister’s ambitious target for doubling exports by 2020, so it is good that it can be easily accessed through retail banks. Simple options can, for example, enable firms to hedge their currency risk, contingent on winning a contract, so they are a useful risk management tool for businesses bidding for orders overseas,” he said.

Draft secondary legislation, published last week, confirms which ‘core activities’ would be contained within the retail banking ring fence once it is implemented in 2019. The ring fence follows the 2011 recommendations of the Independent Commission on Banking. Ring fenced banks will need to be legally and operationally distinct entities from non-ring fenced banks, and will not be able to hold or own the capital of other non-ring fenced entities within the group. As later recommended by the Parliamentary Commission on Banking Standards, regulators will have the power to break up banks that do not comply with the new requirements.

Banking regulator the Prudential Regulation Authority (PRA) will shortly begin consulting on more detailed rules covering the ‘height’ of the ring-fence, or the extent of permitted links between ring fenced banks and other members of their broader banking group.