BOE speaks on effects of ring-fencing for customers

In a speech by James Proudman (Executive Director, UK Deposit Takers Supervision, Prudential Regulation Authority, Bank of England),  it was discussed that the key component of the ring-fence is to provide ‘efficient resilience’ for domestic banking services (critical functions of lending, deposit-taking and payment services for retail and small corporate customers) ‘on which UK households and companies depend.’

It was highlighted that, as it stands, only the five largest UK banking groups and some of their rapidly-expanding competitors will be in scope of the new regime on 1 January 2019 (when work is required to be completed).

It was noted that:

The scale of the change required by 2019 means that the banks are already implementing their plans. For some, this includes seeking authorisation for the new legal entities that will enable them to house their banking activities either inside or outside the fence. By 2019, the PRA is expecting to have authorised the three largest new banks ever created in the United Kingdom. Change on this scale must be planned and delivered carefully, and so is expected to have cost the industry several billion pounds in total by 2019.”

Proudman said that “as with any big infrastructure project, there is some potential for disruption to everyday activities as new group structures are moved into place and new ways of operating are brought on-line.” He wanted to discuss two issues: (1) changes to sort codes, and (2) transfers of business.

Sort codes

First, a sort code is the six digit number that has traditionally been attached to each of our bank accounts to identify the account not just with our bank, but also with a specific branch or product. As the ring-fence goes up, the banks will need to allocate each to one side of the fence or the other. And that means some customers could, in the absence of additional change, find themselves on the wrong side of the fence. To address this, the banks have put in place major programmes to re-allocate accounts to the right side of the fence. The banks estimate that almost a million retail and corporate customers will see changes to their sort codes. Banks will inform those customers that their sort code details are changing, when the change will take place and if there is anything they need to do. Some people may already have been contacted by their banks. To minimise the disruption these changes could cause to customers, banks will ensure that any outgoing payments, for example standing orders and Direct Debits, are made as normal. Banks and payment schemes will also redirect any incoming payments to the new account details. This critical work is being closely overseen by the FCA and PRA.”

Transfers of business

Some banks will need to move the assets and liabilities of significant numbers of customers from one legal entity into another to comply with the legislation. For example, a banking group that creates a new banking entity to house the ring-fenced activities will need to transfer into it the assets and liabilities of those customers it wishes to place inside the ring-fence. To do so, banks can use a transfer of business process called a ring-fencing transfer scheme, where a judge will decide whether the transfer may proceed. In doing so, the Court will consider the impact of the scheme on customers and others, and whether that impact is reasonable for achieving compliance with the legislation. The Court process is expected to begin in late 2017 and last into 2018. As part of that process, customers may receive communications from their banks explaining the proposed moves and the Court process that will facilitate them. The completion of these transfers will require co-ordination between banks, their customers and counterparties, the Courts, the PRA, the FCA and the independent experts reviewing the schemes on behalf of the Court. “

The PRA continues to consider how to supervise banks with ring-fenced structures. Where they find a firm is not complying, they have new group restructuring, or “electrification” powers, which enable the PRA to initiate a number of changes to a banking group subject to ring-fencing, if certain conditions are met. They consider this an important structural foundation provided by the legislation to set the right incentives for banks to comply.