BoE says UK banks making big changes to separation plans

REUTERS: British banks are still making big changes to how they will separate their retail businesses from riskier areas by 2019 as they juggle broader strategy shifts with regulatory demands, t he UK’s banking supervisor told Reuters.

To comply with a new UK law to better protect depositors and taxpayers, at least six UK banks and building societies must set up firewalls around their retail bank by 2019. Banks have to include basic savings and mortgages in the ring-fenced business and exclude other areas like complex derivatives.

The work on ring-fencing is going on in parallel with banks deciding which lines of business they will stay in - a decision the regulator is also closely monitoring to make sure any changes are sustainable and don’t disrupt operations.

“Some of them are coming with quite big changes to their plans, because they’ve had a think about it and revised their view on where their business model is headed,” Andrew Bailey, Chief Executive of the Bank of England’s Prudential Regulation Authority (PRA), told the Reuters Financial Regulation Summit.

Banks i ncluding Barclays, HSBC and RBS are in the process of restructuring to improve profitability and cut costs.

“Their business models are adjusting so these are moving targets,” Bailey said.

The PRA has set rules for how banks should structure their ringfenced operation, but they can get waivers on some aspects to reflect the particular nature of their business model, Bailey told the summit, held at the Reuters office in London.

“You can’t go showering waivers around in disrespect of the policy, but we will use waivers t o achieve sensible ends that are consistent with the policy to get the right outcomes,” he said.

Lloyds, for example, wants to be exempt from having separate boards for the two arms because more than 90 percent of its operations will sit in the ring-fenced business, sources have said.

“That would be a good example,” Bailey said, although he declined to confirm if Lloyds will get its waiver.

Banks say meeting the 2019 deadline will be difficult as they must set up separate IT and operational systems, and are awaiting the PRA to finalise the rules.

“The ti metable is tight, there’s no question about that,” Bailey said. He said the plan “is to deliver it to schedule” and ideally banks will have the separate operations running from the start of 2018.

The PRA’s response to a consultation will be issued shortly and it will launch a second consultation later this year.

Bailey said the regulator had also talked with HSBC about its domicile after t he bank said it is reviewing whether to move its headquarters from Britain to Asia.

“We will obviously be in close contact with t hem because there are important issues for us,” Bailey said.

“It is entirely natural that as an institution your shareholders should demand that you do this assessment. As a private organisation they should do it,” he said.

Bailey also said banks must rewrite pay contracts to comply with new European Union guidelines banning topup “allowances” that breach the bloc’s cap on bonuses.