UK banks that take in more than £25 billion in 'core' deposits from individuals and small businesses will be required to formally separate their deposit-taking activities from their riskier investment banking activities by 1 January 2019. 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 that are "associated with trading and financial interconnectedness" of the wider banking group.
The regulator is concerned about at least one lender and may order an independent inquiry into its "competence and ability" to meet the deadline, a source told the Financial Times.
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 reform expert Tony Anderson of Pinsent Masons, the law firm behind Out-Law.com said: "This is an incredibly difficult issue for banks to be facing just now, particularly with the possibility of a hard Brexit on the horizon and access to the single market potentially no longer being permitted."
"The ring-fencing rules are predicated on ring-fenced banks being entitled to have some of their business within the European Economic Area (EEA). If these banks are no longer able to have access to customers in Europe, they will ripping up plans and starting again with all of their business lines into the EEA, not just those in the ring-fence," Anderson said.