Simon Lovegrove: Hello and welcome to the latest Financial Services Fireside Friday. In this Fireside Friday we take a look at the white paper the government has recently published which sets out proposals for implementing the core proposals from the Independent Commission on Banking. The deadline for responding to the white paper is 6 September 2012 and the government has promised to produce draft legislation this autumn.
Hannah, there is a discussion in the white paper concerning mandated services and prohibited services. Can you tell us a little bit more about that?
Hannah Meakin: Yes. A ring fence bank will basically have to perform any mandated services for its group, so the main one of those would be deposit taking and that would be set out in primary legislation although the government will have a power to add additional mandated services in due course, and it will be prohibited from doing certain prohibited services. The main one of those to begin with being dealing in investments as principal, but again there could be some exceptions to that, and there probably will be. For example, the government is talking about allowing ring fence banks to enter derivatives with counterparties where they are doing that for risk management purposes.
Simon Lovegrove: And the white paper also discusses certain exemptions particularly in relation to high networth individuals and SMEs. What are your thoughts on that Jonathan?
Jonathan Herbst: Well they are desperately trying to work out where the distinction points should be. So for example, in relation to high net worth individuals what they’re looking at is some kind of liquid assets test between £250,000 and £750,000 and they’re looking at some sort of SME test, you know, a threshold that is based on the accounting requirements in the Companies Act. That’s going to be a question that needs to be dealt with in the consultation.
Hannah Meakin: Although that’s not to say that other types of customers won’t be able to use a ring fence bank.
Jonathan Herbst: That’s exactly right.
Simon Lovegrove: And I think its also worth noting in relation to high net worth individuals, it is a positive duty placed on a high net worth individual that they have to opt out.
Jonathan Herbst: Correct, and they’re looking at something akin to the MiFID opt up sort of structure.
Simon Lovegrove: For professional clients.
Jonathan Herbst: Yes.
Simon Lovegrove: And another key issue concerns branches of non EEA headquartered firms operating in the UK. What has the white paper said about that?
Jonathan Herbst: Well, both in relation to them and more generally we’re talking here about retail deposits and I use “retail” in the broader sense of the word of £25 billion or above. I think what they’ve done is a deal here where it’s only going to be the branch deposits in those cases and they’re not going to look at the bank as a whole, but you’ve also got to see it from the other way round. You know if you look at a bank within a group, its only going to be broadly speaking the UK activities. If you’ve got overseas branches of the bank then provided they don't have a material impact on the UK economy, the test is more complicated, then its going to be outside these rules. So a successful piece of bank lobbying here and a very significant change to the original proposals I think.
Hannah Meakin: I think the other point to note on that is that a ring fence bank wont be able to have a branch or a subsidiary that does business outside of the EEA.
Simon Lovegrove: And in practice how will the ringfence be created and maintained?
Jonathan Herbst: Well, I think practically that's the biggest question from a lawyer’s point of view. I mean you just think of a couple of practical things. The language of the paper - we got to see the detail in the legislation- talks about separate IT, how are you going to have any kind of group provision, how are the costs of that going to work. What is clear is, for example, you’re going to have to have contractual relationships of whether its outsourcing group services. I think how you’re going to get sufficient independence to be able to genuinely say on a default of the rest of the group, the retail bank could carry on. I think that’s going to be the big challenge with the regulators, the big challenge in legal documentation.
Simon Lovegrove: Hannah, in the white paper the government says that the independence of the retail ring fence bank should be underpinned by strong corporate governance, can you tell us a little bit more?
Hannah Meakin: Absolutely, I think there are 2 main points here. First of all the government is proposing that at least half of the board should be independent and shouldn't have had a role with either the ring fence bank or the rest of the group in the previous 3 years. And the second point relates to the committees. It’s quite important I think in the government’s view that there should be strong committees definitely in relation to risk, and probably also in relation to nomination and remuneration.
Simon Lovegrove: Jonathan, chapter 3 of the white paper deals with loss absorbency. In particular, there’s reference to so called PLAC, and also reference to bail in.
Jonathan Herbst: I mean the basic concept here is that you’re going to have not just a capital requirement but also an overall for systemic bank 17% requirement which includes Tier 2 and also unsecured types of debt. There’s a lot of work to be done on what types of debt are going to be eligible to be accounted for these purposes and that’s where the bail in concept applies. Basically the debt is going to actually be subordinated in certain near insolvency type situations and effectively be converted into a form of equity effectively with no return. I mean that’s what they’re looking at, and the detail is going to be really key when the legislation comes out.
Simon Lovegrove: And finally in chapter 4 of the white paper the government sets out a series of proposals aimed at improving competition within the UK banking industry. In particular there’s discussion regarding a current account redirection service. This is something new, would you like to explain a bit more.
Hannah Meakin: Yes absolutely. The industry’s actually already working on this and they’re aiming to deliver it by September next year. It will basically be a service whereby customers will be able to switch their bank accounts from one bank to another more easily and at no cost, so they should be able to do that within 7 days. And as you say the idea of that is to try and increase competition within the industry.
Simon Lovegrove: And the banking industry is committed to doing this by September this year.
Hannah Meakin: Yes, exactly.
Simon Lovegrove: That concludes this Fireside Friday, catch us next time bye bye.
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