Last week, Douglas Flint, the chairman of HSBC, told the House of Lords' European economic and financial affairs sub-committee that the changes required by the new ring-fencing rules would be "very expensive", and estimated that the cost to HSBC of implementing them would be between £1 billion and £2 billion.
Mr Flint's comments follow the publication earlier this month of the Prudential Regulation Authority's Consultation Paper on the implementation of ring-fencing (PRA CP 19/14) (the CP).
What are the latest ring-fencing proposals? The CP sets out the PRA's proposed ring-fencing policy, including rules and supervisory statements, in three areas:
The legal structure of banking groups Governance Continuity of services and facilities (i) Legal structure
Under the latest proposals, the PRA's expectation is that a Ring-fenced bank (RFB) should not have an ownership interest in any entity which undertakes excluded or prohibited "investment banking" activities. Instead, RFBs and entities that can conduct excluded or prohibited activities are expected to be structured as separate clusters of subsidiaries beneath a UK holding company. This is known as a "sibling structure". By creating legally and operationally separate units to house their retail and commercial banking businesses away from their investment banking divisions, the PRA expects that risks to an RFB's provision of core services will be reduced by preventing losses related to "riskier" activities from being passed to an RFB from a subsidiary. The PRA also expects that the rules will prevent an RFB becoming financially dependent on the income or profits of such activities.
The Financial Services and Markets Act 2000, as amended by the Financial Services (Banking Reform) Act 2013, requires the PRA to make rules on board membership for group ring-fencing purposes. In the CP, the PRA proposes the following rules on the membership of the RFB's board:
At least half of an RFB's board, excluding the chair, must be independent non-executive directors (NEDs) The chair of an RFB must be independent during his or her tenure as chair The chair of an RFB must not hold another chair position in another group entity board No more than one third of an RFB's board members may be current employees or directors of another entity in the group An RFB executive director on the board of an RFB must not hold other executive director positions on the board of another entity in the group...