08 January 2017

Financial Times: Banks risk missing 2019 ringfence deadline

UK regulators are concerned that banks may fail to meet a 2019 deadline for separating retail money from riskier investment banking activity, under rules aimed at preventing a re-run of the financial crisis.

The Prudential Regulation Authority, part of the Bank of England, has written to banks’ senior management to gain assurance that their plans to comply with so-called ringfencing rules can be achieved by the deadline, according to two people familiar with the process.

One adviser working with banks said that the watchdog is considering ordering an independent inquiry, called a “skilled persons’ review”, into at least one lender over its “competence and ability” to execute its plans on time.

Under ringfencing rules, which have become the UK’s main regulatory response to the financial crisis, banks with more than £25bn of deposits must hive off their consumer-facing business from riskier investment banking.

But the task is weighing heavily on resources at a time when they are coming under pressure from other regulations, record-low interest rates and uncertainty following the UK’s vote to leave the EU.

It is the biggest structural reform ever imposed on UK banks and it is forecast to cost the industry billions of pounds to hit the deadline of January 2019. The Treasury has in the past estimated that it will cost the banks up to £3bn to set up, with annual running costs of up to £4bn.

Steven Hall at advisory firm KPMG said: “Ringfencing is a large piece of work that needs to be undertaken at a time when banks are considering the impact of Brexit, more prudential regulation and conduct issues — and the economy isn’t going anywhere fast. They [the PRA] want to make sure this happens by a certain date, because it’s an immovable deadline.”

A key part of the task is managing the risks involved in separating the various computer systems involved. Royal Bank of Scotland’s failed attempt to separate its Williams & Glyn division as an independent bank, in part because of technology problems, illustrates one of the obstacles facing the banks as they prepare to split up their businesses.

Banks have aired concerns over the timing of ringfencing and are seeking clarity on the potential fallout from Brexit for their plans. However, the Treasury and PRA last year rejected any delay in the deadline.

Full article on Financial Times (subscription required)

© Financial Times