Formal ring-fence compliance plans due from big UK banks this week

Banking reform expert Tony Anderson of Pinsent Masons, the law firm behind Out-Law.com, said that the banks' plans for compliance with new 'ring-fencing' requirements would help to clarify the future of investment banking and the concept of universal banking. The biggest UK banks will be required to formally separate their deposit-taking activities from 1 January 2019.

"These plans will highlight the difficulties which the high street banks are currently undergoing in deciding, for risk purposes, what can and cannot be included within their ring-fenced banks," Anderson said.

"Once it had been decided where the ring-fence lies, it will be a herculean task to implement within each bank the necessary requirements operationally by 1 January 2019. Implementing these plans successfully within this timeframe whilst maintaining 'businesses as usual' will be a measure of the calibre of the board and management of UK banks," he said.

Amongst the changes banks would be required to implement as part of the ring-fence would be appointing different boards to each bank; employing staff separately, with separate pension schemes; putting in place contracts between the different parts of the banks; negotiating separate supply contracts between each part of the bank and third party suppliers; and ensuring that bank activities, such as lending, were funded from separate sources, he said.

The new requirements will apply to banks that take in more than £25 billion in 'core' deposits from individuals and small businesses. Currently, this applies to the five largest UK banks: HSBC, Barclays, Royal Bank of Scotland, Santander UK and Lloyds Banking Group. However, banking regulator the Prudential Regulation Authority (PRA) said in October that it expected any bank likely to reach the threshold by 2019 to submit a provisional plan. Spokespeople for the UK's two next-biggest retail banks Virgin Money UK and TSB told Out-Law.com that they were submitting ring-fencing plans as part of the new requirements.

The legal framework governing the new regime is contained in the Banking Reform Act, which gives effect to the 2011 recommendations of the Independent Commission on Banking, known as the Vickers Report. Affected banks will be required to separate their core functions from the "activities associated with trading and financial interconnectedness" of the wider banking group into a legally and operationally distinct entity, which will not be able to hold or own the capital of other non-ring fenced entities within the group.

Setting out its expectations for firms in October, the PRA said that it expected banking groups that carry out both ring-fenced and "excluded" activities to adopt a 'sibling structure' of separate clusters of subsidiaries beneath the one UK holding company. It said that no more than one third of the board members of a ring-fenced bank would be allowed to hold roles elsewhere in the group, to ensure that the ring-fenced bank could "take decisions independently" of the rest of the group. Banks' plans are expected to be "consistent with resolution planning and prudential standards" and should ideally include provisional balance sheets and profit and loss accounts for each of the new entities, according to the PRA.

The PRA intends to consult shortly on the rules which would govern intragroup transactions and the risks to which ring-fenced banks may be exposed, according to the October announcement. It expects to finalise the new regime in 2016.