The UK government will take a zero-tolerance approach towards banks that fail to abide by the incoming ring-fencing rules separating investment from retail banking operations, warns UK Chancellor, George Osborne.
During a speech in Bournemouth today at JP Morgan's administrative offices (4 February), the chancellor reinforced the administration's commitment to pressing ahead with its plans to force banks to separate their investment and retail divisions.
This recommendation was put forward by the UK Independent Commission on Banking (ICB) as a way of ensuring lenders will not be able to rely on taxpayer-funded bailouts in future should they experience difficulties similar to those at the height of the global economic slump in 2008.
Osborne was speaking ahead of the unveiling today of the Banking Reform Bill which puts the ICB's recommendations into legislative action. Osborne said that taxpayers have been angered by the banks’ behaviour in recent years and the need to bail out those deemed “too big to fail” was an unacceptable course of action that should never be repeated again.
The new legislation will give the UK government and the planned new watchdog later this year, the Prudential Regulation Authority (PRA), the powers to “electrify the ring fence” if banks fail to separate branch operations from the dealing room floor, levying fines or perhaps even enforcing a full sepration of retail and investment bankingn units if compliance is not satisfactorily achieved.
The PRA is set to replace the Financial Services Authority (FSA), along with the more retail-focused Financial Conduct Authority (FCA) and the Bank of England's Financial Policy Committe (FPC) as part of the post-crisis regulatory shake-up in the UK.
"My message to the banks is clear," said Osborne. "If a bank flouts the rules, the regulator and the Treasury will have the power to break it up altogether - full separation [will be enforced], not just the ring-fence."
The potenital technology implications of the UK banking ring-fence are profound because depending upon how strictly the regulators enforce it seprate accounting and operational systems may need to be put in place to enable any future "full separation" to be enforced.
For a so-called 'universal bank', such as HSBC or Barclays, that provide retail, investment and corporate banking services - and which has no doubt spent the last couple of decades seeking to integrate its systems in the name of efficiency - the consequences could be profound.
According to Osborne, his predecessor as chancellor, Alastair Darling, was forced to provide state funding to support Royal Bank of Scotland (RBS) during the last crash and this is not something he wants to repeat. “Not just RBS on the High Street, but the trading positions in Asia, the mortgage books in sub-prime America, the property punts in Dubai [all had to be supported].
“I want to make sure that the next time a chancellor faces that decision they have a choice. To keep the [retail] bank branches going, the cash machines operating, while letting the investment arm fail.”
Reacting to the legislative programme, however, Anthony Browne, chief executive officer (CEO) of the British Bankers’ Association (BBA), criticised the new rules for "creating uncertainty for investors, and making it more difficult for banks to raise capital, which will ultimately mean that banks will have less money to lend to businesses.” He added that it would also undermine London’s position as a leading global financial centre.
Tony Anderson, a partner in the banking team at international law firm Pinsent Masons, commented: “The UK is currently the only jurisdiction in the world which is specifically ring-fencing retail banking activity from other banking operations. Other jurisdictions are focussing on separating only certain parts of investment banking activity such as the trading of the bank’s own assets.” The US, for instance, has banned proprietary [prop] trading.
“These measures will only reinforce this differentiation making it harder for universal banks with global operations to continue to maintain the same operations in the UK in an already difficult trading environment. Creating synergies will be a problem.”
Shared Infrastructures to be Split?
“With George Osbourne promising to electrify bank ring fences between retail banking and investment banking operations, banks need to seriously start evaluating the system and process implications, in addition to the impact on legal structure and capital demands," said Daniel Mayo, practice leader for global financial services technology at the Ovum consultancy. "While the primary core banking systems that run these lines of business are typically quite separate, IT infrastructure and systems that support payments, risk management, finance and other back-office functions are often shared."
"The exact operational requirements of ring-fencing are still to be finalised. However, the primary aim of being able to rapidly separate ring-fenced operations will have significant implications on IT that will extend beyond merely changing the structure of shared services functions. Banks will need to prove that the operational integrity of support functions can be maintained in the event of separation, from commercial, governance and direct operational perspectives," added Mato. "While the use of shared services will remain, UK banks will also need to adjust commercial and governance models in the short-term, but in the longer-term Ovum expects greater divergence at system and operational process levels between ring- and non-ring fenced business units.”