Treasury considering plans to weaken banking ring-fence governance requirements

The Sunday Times (registration required) quoted "senior City and Treasury sources" on the possibility that the requirement for the different parts of the bank to be under the control of independent boards could be removed from the final rules. The paper said that senior bank executives were having "weekly behind-the-scenes talks with the Bank of England" on the possibility of modifying the proposed new rules.

A senior executive at one of the UK's top four banks told the Sunday Times that industry regulator the Prudential Regulation Authority (PRA) had "no interest in creating an unlevel playing field for British banks". A Treasury source confirmed that banks' main boards could potentially be allowed to make decisions on all parts of their operations, provided that retail boards were given the final say on "important issues".

The PRA is due to publish a final consultation on its proposals later this year, and plans to confirm final rules about the future legal structure and governance arrangements that will be required of the banks at the start of next year. This will give affected banking groups "sufficient time for implementation", it said in May.

From 1 January 2019, UK banks that take in more than £25 million in 'core' deposits from individuals and small businesses 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' these 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.

Setting out its expectations for firms in October 2014, 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 wider banking group.

"Whilst time is running out for banks to fully implement their ring-fenced operations under Vickers, it appears that there is still light years between the banks and the regulators on what banking reform may ultimately look like," said banking reform expert Tony Anderson of Pinsent Masons, the law firm behind Out-Law.com. "In the meantime, something or someone will have to give."