UK Banking: Ringing In The Changes

Author:Mr Peter Green, Jeremy C. Jennings-Mares and Lewis G. Lee
Profession:Morrison & Foerster LLP
 
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It has been three years since the Independent Commission on Banking (the "IBC"), chaired by Sir John Vickers, published its final report and recommendations on the reform of the UK banking system in response to lessons learnt during the financial crisis (the "Report")1. As part of the Report's suggested package of solutions, it was proposed that UK banking stability required structural reform in order to ring-fence (from risks present elsewhere in the financial system) banking services that are integral to the provision of payments services to customers in the European Economic Area (EEA). Since publication of the Report, the UK Government has implemented many of its recommendations through the Financial Services (Banking Reform) Act 2013 (the "Banking Reform Act"), which came into force in December 2013. Amongst other things, the Banking Reform Act (primarily through amendments to the Financial Services and Markets Act 2000 ("FSMA")2) lays the foundations for the ring-fencing requirement, defining the 'core activities' which should be quarantined within the ring-fence3 (a "Ring-Fenced Body" or "RFB") and restricting RFBs from performing certain 'excluded activities'4.

On 6 October 2014, the Prudential Regulation Authority ("PRA") published proposed rules and sought feedback in respect of a package of measures designed to promote resilience and resolvability in the UK banking sector5. The PRA's publications include consultation paper CP19/14 (the "Consultation") on the implementation of ring-fencing, which provides a draft supervisory statement covering legal structure, governance and the continuity of services and facilities. This update aims to highlight some of the PRA proposals, as well as confirm that all affected firms are expected to submit preliminary plans detailing their anticipated legal and operational structures by 6 January 2015.

Legal Structure

One concern of the PRA highlighted in the Consultation, is that prohibiting an RFB from conducting excluded activities will be insufficient to meet the objectives of ring-fencing, to the extent that the RFB is structurally connected to either a parent or subsidiary entity that is able to conduct such activities. This might be, for example, because of losses being passed to an RFB from a subsidiary, or because a parent company might restrict an RFB's ability to make independent decisions6. It is argued, therefore, that RFBs need to be protected from risks arising in relation to connected entities. Accordingly, it is proposed that:

entities undertaking excluded or prohibited activities may not have an ownership interest7 in an RFB; and an RFB may not have an ownership interest in entities undertaking excluded or prohibited activities. As a consequence, the PRA advocates what is commonly referred to as a 'sibling structure', whereby one or more sister companies are used to engage in excluded or prohibited activities. Such companies can be owned by a common parent holding company, although the RFB should not have direct controlling interest in or be owned by those companies. The PRA states that future consultations will further enhance this structural separation by...

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