BoE unveils draft rules for ring-fencing UK banks

Prudential regulator issues consultation on rules relating to legal structure, governance and maintaining core operations; Andrew Tyrie welcomes structural recommendations
Bank of England

The Bank of England (BoE) today revealed draft rules for the ring-fencing of UK banks' retail operations, in a move aimed at separating a bank's riskiest operations from its core functions.

The Prudential Regulation Authority (PRA), the arm of the central bank responsible for micro-prudential regulation, issued a consultation structured around three main aspects of ring-fencing: legal structure; governance; and the maintenance of core operations in the event of a partial collapse of the banking group.

Ring-fencing was proposed in the UK as part of the Vickers report, which presented the findings of the Independent Commission on Banking in 2011, recommending that UK banks have core retail functions protected, while riskier operations such as investment are kept separate.

The UK government issued a White Paper in 2012 and formed the Parliamentary Commission on Banking Standards to review the proposed laws. The commission recommended that ring-fencing go ahead, and the legislation was passed as the Financial Services (Banking Reform) Act 2013. The PRA was tasked with the practical design of the ring-fencing rules.

The rules on legal structure set out the central elements of ring-fencing: the ring-fenced institution should not own entities that conduct "excluded or prohibited" activities – nor should the institution be owned by such firms in order to promote independent decision-making.

The rules on governance permeate deeper into the institutions' operations, aiming to ensure that effective decisions are taken throughout. They target governance, human resources, internal audit, remuneration and risk management.

Finally, the rules on continuity of service aim to allow parts of the ring-fenced institution's wider group to malfunction or fail outright, without damaging core retail activities.

Andrew Tyrie, the UK MP who headed the Parliamentary Commission on Banking Standards, says the PRA's recommendation that institutions not be owned by riskier parts of the business is "welcome".

Banks with core deposits greater than £25 billion will be subject to the rules. The government intends that they take effect from January 2019.

Tyrie warns "the more complex the rules, the more vulnerable they are to gaming", and calls on UK banks to implement the rules "constructively". Regulators should also be vigilant, he says, to make sure the ring-fence stays in place as banking evolves.

The PRA also issued a discussion paper on the topic of ensuring the continuity of operations during a resolution process. This sets out the PRA's "preliminary views" on the standards firms' operations should meet to allow an orderly process of recovery and resolution.

Two further papers, one on protecting bank depositors and the other on holders of insurance policies, complete the set of consultations issued today. The BoE invites comment on all four, with a deadline of January 6, 2015.

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