Once the UK's banks have completed their strategic analysis and determined what businesses and services are inside or outside their retail operations, which are to be ring-fenced under recommendations made by the Independent Commission on Banking, they will face the challenge of constructing it. For some banks, this implementation project may be relatively straight-forward but for many it will need careful planning and execution in order to deliver the best solution given the many complexities involved.
Many banks have undertaken legal entity restructuring programmes in the past to satisfy tax, regulatory capital and liquidity requirements. While creating a ring-fence will have many constraints, banks should approach the task as an opportunity to reduce complexity and make their wider group structure more efficient wherever possible. In so doing, they will make further progress towards becoming 'resolvable', ideally on a cross-border basis, in the way expected by the UK authorities and the Financial Stability Board.
In implementing the ring-fence, banks will have many different aspects to consider, some of which include:
Practical considerations
- The timing and sequencing of activities that need careful, up-front planning. Many of the changes required to set up a ring-fence can take more than 12 months, with the timescales in the gift of regulators or courts. Examples include Part VIIs, restructuring legal entities and raising loss-absorbent capital.
- The authorised entities to use, as the investment bank and the ring-fenced entity are likely to both require authorisation as deposit takers. For many this will not require the authorisation of new firms but instead a choice of which existing licence will be most beneficial to use.
- Communications will be multi-faceted and complex. A strategic plan to ensure support from the regulators, rating agencies, market and the press will be key to success.
Regulatory considerations
- The customer transition should be communicated to the customer and the regulator as a positive change that increases depositor protection. The customer experience should not be harmed.
- Governance, risk management, compliance and control will have to be appropriately designed and structured within the ring-fence.
- Non-European Economic Area business will create complexity if entities and branches have to be moved outside the ring-fence.
Technical considerations
- Taxation, where there may be competing efficiencies and detrimental impacts on, for instance, deferred tax assets or cross-border interactions.
- Pensions, debt covenants and dividend traps may create blocks on change that are likely to need careful consideration.
- Hedging, collateral and other treasury arrangements will need to be adjusted. The activities should be split between the ring-fence and non-ring-fenced entities.
Operating considerations
- The target operating model must reflect the resolvability needs of the group and the split and structure of the ring-fence.
- Process, data and technology across the business and for finance, risk and reporting will need to be specifically structured for the ring-fence.
- Access to a payment system for a ring-fenced bank will need to be from a ring-fence. Thus the investment banking operations may have to use a separate process.
This list is not exhaustive. In short, setting up a ring-fence will involve a complex, interdependent set of activities spanning a number of years. Banks should begin to work through their options, potential optimisation opportunities, timings, costs and resource needs as soon as possible in order to plan appropriately. Even if the time frame for establishing the ring-fence stretches to 2019, for many that will not be generous.
Simon Zeital is a director at Deloitte
