Following the introduction of the new ringfencing law, due to come into force 1 January 2019, the biggest UK banks strongly voiced their concerns.
Although this new law will be difficult (and expensive!) for all banks involved to implement, firms with more global and diversified business models are facing additional complexities. In particular, HSBC has confirmed the move of its ‘ringfenced’ headquarters from London to Birmingham in light of this regulation.
Overall, the new rule has produced a wide spectrum of responses and initial estimates for the cost of implementation range from “a few hundred million pounds” for banks with over 90% of their business remaining within the fence to “£1.5bn at HSBC”, where approximately 91% of their business falls outside the ringfence. However, since its introduction, the majority of the high street banks believe they now have feasible solutions for dividing up their businesses.
The ringfencing rule
With the financial crisis came a flurry of domestic and international reforms to bank regulation. Many of these reforms are seeking to improve the resilience and resolvability of banks, and some of these transforms include making changes to a bank’s structure.
One of the main themes of the UK’s regulatory response to the financial crisis falls under the latter by obliging banks – with more than £25 billion worth of deposits – to fence off their riskier investment activities from consumer-facing businesses (‘core services’).
“The Act defines three ‘core services’:
- facilities for the accepting of deposits or other payments into an account which is provided in the course of carrying on the core activity of accepting deposits;
- facilities for withdrawing money or making payments from such an account; and
- overdraft facilities in connection with such an account.”
These changes are intended to ensure that ringfenced bodies (RFBs) are protected from shocks originating from the rest of their banking group or the financial system, minimising disruption to the continuity of the provision of these ‘core services’.
Overview of the PRA consultation paper 33/15
Part VII of the Financial Services and Markets Act 2000 (FSMA), control of business transfers, allows for an application to be made to the court for an order sanctioning an insurance or banking business transfer scheme and describes the process leading up to that approval. In addition, the Financial Services (Banking Reform) Act 2013 legislated for an additional process for transfer of business known as a ringfencing transfer scheme (RFTS).
An RFTS is a “form of transfer of business that will enable banking groups that include a ring-fenced body to restructure their businesses to comply with the ring-fencing requirements”.
The Prudential Regulation Authority (PRA) was awarded new powers in respect of the RFTS by the Financial Services (Banking Reform) Act 2013. On 18 September, the PRA published a consultation paper, closing on 30 October 2015, seeking views on a draft statement of policy detailing the PRA’s approach to RFTSs, by outlining:
- The nomination or approval of the author of the scheme report
- The approval of the form of the scheme report
- The consent to an application to the court for an order sanctioning an RFTS.
The consultation paper highlights a number of key steps that must be taken in order for an RFTS to be sanctioned:
- When a firm is considering undertaking an RFTS, it should approach the PRA at an early stage. The firm should also consider whether any aspects of the proposal should be discussed with the FCA
- The initial documentary information on the scheme should be provided to the PRA and shared with the FCA, and should include the broad outline of the RFTS, including a provisional timetable
- The firm must make an application to the court
- To aid the court in its decision as to whether to sanction the transfer, the court must be provided with a scheme report to be authored by a ‘skilled person’ (a person appearing to the PRA to have the skills necessary to enable a person to make a proper report)
- The PRA must approve the form of the scheme report, the skilled person and the RFTS application to the court and will issue certificates to verify the PRA’s consent to the application.
A ‘skilled person’
The FSMA requires that a scheme report can only be made by a ‘skilled person’, who appears to the PRA to have the skills necessary to enable that person to make a proper report and who has been nominated or approved for the purpose by the PRA.
The skilled person making the scheme report must be a person who is independent, has relevant knowledge, both practical and theoretical, and experience of the types of business transacted.
The consultation paper notes that the PRA considers a firm’s external auditor to be eligible for nomination as an expert making the scheme report, as long as the individual can demonstrate that the criteria set has been satisfied. In addition, the PRA will consider each nomination on a case-by-case basis.
The scheme report
Firms must produce a scheme report to accompany the court application when seeking approval for an RFTS. This report will have to be in a form that is approved by the PRA, following consultation with the FCA.
The legislation requires that the report addresses the following:
- Whether persons other than the transferor concerned are likely to be adversely affected by the scheme
- If so, whether the adverse effect is likely to be greater than is reasonably necessary. Whilst the PRA does not require a particular format to be adopted for the scheme report, there are some common elements that should be included. For example, the report should mention who appointed the skilled person, who is bearing the costs of that appointment, a statement of the skilled person’s professional qualifications and descriptions of the experience that makes the individual appropriate for the role.
Overall, this draft policy statement provides guidance on how the ‘skilled person’ would approach the statutory question and other matters that should be addressed in the scheme report and RFTS. This consultation will end on 30 October 2015, after which a final statement of policy on the PRA’s approach to RFTS will be issued.