The uncertainty created by the UK’s recent referendum decision to leave the European Union is making the country’s banks reluctant to discuss openly their plans for ring-fencing parts of their domestic operations. This is leaving corporate treasurers with little or no idea of what changes they will need to make in response.
There is some information on the plans, although the specifics of what have so far been submitted to the Prudential Regulation Authority (PRA), the UK banking regulatory that is overseeing the ring-fencing structural reform, have not been made public.
Barclays had proposed initially to create two separate organizations, with the ring-fenced organization initially owned by the group. Once significant capital had been created, the bank would then change to a sibling structure where the two organizations would sit side by side.
However, the latest plans are believed to have been changed to the sibling structure before being submitted to the PRA earlier this year. The details submitted need to be assessed independently and court-approved before they can be implemented.
Although still waiting for formal approval of its plans, Barclays has become the first bank to set a deadline for its implementation of ring-fencing, stating earlier this month it would put the new structure in place over the Easter weekend in 2018, which will fall on Friday, March 30 to Monday, April 2 – about nine months ahead of the deadline set by UK regulators of January 1, 2019.
The ring-fencing reform means that banks holding more than £25 billion in UK deposits must separate their retail banking division from the rest of their banking businesses.
A reorganization of this nature would be a daunting task at the best of times, but the current economic climate in the UK is causing even more worry. Banks have been expressing concern over the impact of Brexit on their ring-fencing plans, although the PRA has resolutely stated there will not be an extension to its 2019 deadline.
Following the Brexit referendum result, Bank of England governor Mark Carney said there would be no change to current financial regulation, stating: “It will not change until the process of the UK’s withdrawal from the EU is complete, until the UK is no longer a member of the EU and until EU law ceases to have effect in the UK. The law is the law. Rules are rules. The Bank is continuing to implement the current regulatory framework until any new arrangements with the EU take effect.”
Banks are reluctant to speak openly about their plans: Barclays, HSBC, Santander, Lloyds and RBS, as well as the PRA itself, were unable to provide official comment for this article.
A representative from one bank said the firm was still unsure of what would be required, adding: “The rules aren’t yet finalized. What we’ve said in the past is that the majority of what is corporate banking will sit outside the ring-fence, with our retail businesses sitting within the ring-fence – that would include our relationships with corporates."
For now the focus remains on banks, but the transition will also require substantial work from corporates. However, they are not being kept up to date with information, according to Stephen Baseby, associate policy and technical director at the Association of Corporate Treasurers (ACT).
This lack of information is putting treasurers on the back foot, as they do not know what they will have to prepare for. Corporates are not being given sufficient indication of how their banks are looking to separate their operations, and the impact it will have on them.
“We know of one big MNC which expects to be required to change all of its sort codes,” says Baseby. “Large corporates are facing embarking on a task with the complexity of Mifid II. It is a horrendous task to look forward to.”
Baseby adds that Barclays and Lloyds, for example, had been looking at dividing their businesses differently.
“The ACT is aware of two ring-fencing models: vertical, with the retail bank sitting below the investment bank, as reported for Barclays in October 2015, and the sibling model, where the retail bank sits alongside the investment bank under a common holding company which we believe has been favoured by Lloyds," he says. "There is nothing saying these models have not been subject to further change during discussions with the PRA.”
As there is no certainty on the final structure, treasurers are left asking how they will work with these new organizations – and what it will mean for their cash-management strategies.
“Treasurers have questions on what will happen to their documentation, and if they will be dealing with one entity or two,” adds Baseby. “[If it is two,] what is the credit relationship between them and how will they know if their cash is with a counterparty or a trading business where they would not want to take on the risk?
"Ring-fencing creates the inability to have cross-relationships within groups that would normally be used to provide comfort.”
A proper assessment cannot be made by a corporate until its treasurer knows the full details.
“Each corporate will need to look at their banking relationships, how they are related and the impact it may have,” says Baseby. “The whole process becomes messier.”
There might be some small benefit, with corporates potentially working with multiple banks to access the best products.
“The ACT has had regulators express concern that mid-sized companies get dominated by one bank,” notes Baseby. “Ring-fencing could be the start of the break-up of this perceived monopoly.”
While a move away from relying on just one bank could have positive aspects, Baseby also worries how this will affect smaller companies that suddenly find they have an increased workload if they need to repeatedly provide the same information to multiple banking partners.
“This move to having multiple banks follows the trend of the larger corporates, but they have enough business to pass around and enough people to keep track of what is going on," says Baseby. "For smaller corporates that don’t have the same scale of business or workforce, they don’t, for example, want to have to keep repeating their credit position.”