HSBC's possible relocation of HQ points to impact of UK banking reforms, says expert

Banking law specialist Tony Anderson of Pinsent Masons, the law firm behind Out-Law.com, said the "cost of compliance" has grown and that financial institutions are increasingly scrutinising "the business case" for remaining rooted in UK financial centres such as London and Edinburgh.

Anderson was commenting after HSBC announced that it has launched a review into where the company's headquarters should be based. It is currently headquartered in London.

In a statement, HSBC group chairman Douglas Flint said: "It is … essential that we position HSBC in the best way to support the markets and customer bases critical to our future success. In this regard, we also have to take fully into account the repositioning of our industry being driven by the regulatory and structural reforms which have been put in place post crisis."

"We are beginning to see the final shape of regulation and of structural reform, including the requirement to ring fence in the UK. As part of the broader strategic review taking place, the Board has therefore now asked management to commence work to look at where the best place is for HSBC to be headquartered in this new environment. The question is a complex one and it is too soon to say how long this will take or what the conclusion will be; but the work is underway."

Anderson said HSBC's announcement is "one of the first tangible outcomes" of the so-called Vickers reforms.

From 1 January 2019, the UK's biggest banks will be required to formally separate their deposit-taking activities from their riskier investment banking activities, as recommended by the Independent Commission on Banking chaired by Sir John Vickers in 2011. Affected banks will have to 'ring-fence' their core functions into a legally and operationally distinct entity, which will not be able to hold or own the capital of entities "associated with trading and financial interconnectedness" of the wider banking group.

"For some financial institutions with predominantly non-ring-fenced operations, making the business case for remaining HQ’d in the UK has been increasingly difficult to make to many shareholders," Anderson said. "The level of concern around personal accountability for senior executives, increased sophistry around remuneration and claw back, and the sheer cost of compliance has only increased as time has gone on. Some of the rules are now so complex as to be close to impossible to comply with."

"The timing of the announcement will concern the coalition government, which will now face an anxious wait to see the outcome of the review – and what impact incoming ring-fencing regulation has upon where banking operations are substantively based in future," he said.

HSBC said last month that it intended to base the head office of its ring-fenced bank in Birmingham.

Sir John Vickers told MPs in 2011 that there was a "low probability" that banks would leave the UK as a result of his proposals to separate the retail activities of a bank from its investment operations.