U.K. Banks Seek Clarity on How to Split Off Retail Businesses

  • British Bankers' Association: unclear rules may cause delay
  • Jan. 29, 2016 is deadline for submitting `near-final' plans

Banks need clarification on U.K. requirements that their investment banking units must be separated from core retail businesses, the British Bankers’ Association said, as the deadline approaches for the banks to present “near-final” plans to regulators on how they’ll accomplish the split.

Key parts of the implementing regulations still need to be clarified, which may in turn cause delays that hinder banks’ ability to put in place the separation, known as ring-fencing, by Jan. 1, 2019, as required, the bank lobby group said in its response to a Bank of England consultation on aspects of the law. Banks are due to submit a round of preparatory plans by Jan. 29 to the Prudential Regulation Authority, a unit of the Bank of England, as part of their preparations for the new regime.

“Banks have been working up their strategic plans and getting to grips with what ring-fencing means for their businesses and the services they can provide to customers,” said Paul Chisnall, the BBA’s executive director for financial policy and operations. “There is only so far that they can go before the regulatory rules are finalized and they are given regulatory sign-off for the way in which they would like to proceed.”

The PRA requires lenders with more than 25 billion pounds ($35.5 billion) of deposits to set up firebreaks between their consumer operations and investment banks. The law, based on the report of John Vickers’s Independent Commission on Banking, aims to ensure that core services such as deposit taking and payments will be protected if riskier units have to be shut down in a crisis.

The PRA hasn’t yet set final rules because other regulations are being developed in parallel that may affect the outcome. The regulator has embarked on a series of consultations setting out different aspects of implementation, followed by “near-final” rules and further consultations.

The bankers’ group asked the BOE “to publish the final rules following on from the consultation as soon as is reasonably possible” in the first half of 2016. The questions raised in the central bank’s consultation address “highly relevant” topics, such as collateral allocation, for banks that are trying to put the ring-fencing in place, the BBA said.

As the proposals currently stand, “the approach would appear to prevent holding companies from carrying out activities that would usually be expected, and in some instances required, of a holding company,” the BBA said. U.K. banks are typically structured as holding companies that own operating units, a design that, in the case of a collapse, is intended to allow the regulator to wind down or restructure the parent company while leaving the operating unit intact.

Once submitted, the plans will require independent assessment and court approval before they can be implemented, a process that will take much of 2017, the group said. Also, assets, contracts and relationships, some of which are held abroad, will also need to be transferred between the different parts of the group in time to meet the 2019 deadline.

“It is not possible to quantify these issues in any sort of meaningful manner until customer consents, where required, are sought,” the BBA said. “It would be helpful to understand the PRA’s views on these challenges and how banking groups might address these concerns.”

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