The panel’s report makes the valid point that the existing ring-fencing regime needs to be more adaptable, but also more coherent with wider regulation. Taken in the context of the volume of regulatory change which has been introduced since 2011 (and that which is in the pipeline over coming years), it is difficult not to agree with the panel’s conclusion that a sector as dynamic as the British banking sector needs a regulatory regime which is as dynamic as the sector it governs and flexible enough to adapt to changing economic threats.
However, the report concludes that ring-fencing has not increased the resilience of the less complex banks within the regime – the benefits of the regime are attributed solely to the ring-fenced banks within a banking group, rather than the non-ring-fenced banks. Given the inherent purpose of the ring-fencing design (at its most simplistic, to “ring-fence” retail banking services from investment banking), it is particularly striking to see the Bank of England’s submission that carving out the ring-fencing bank while placing the non-ring-fenced bank into insolvency would not be a viable solution.
So where does this leave a complex banking group or a bank approaching the ring-fencing threshold?
Whilst the particular issue identified by the Bank of England has, to a certain extent, been resolved by later legislation in the form of the UK resolution regime (which sets parameters around how bank failure would be managed over the “resolution weekend” to ensure that there is an orderly process in place), the report rightly notes the inconsistency between the two regimes (particularly given that a number of significant banking groups will have critical functions either side of the ring-fence). Layered on to that is the conflict between the demands of the operational resilience regime, which looks at end to end resilience of important business services on an even handed basis across the group, and banks are facing the need to juggle between the different regulatory requirements. There is also the added complexity of exposure to disputes and investigations that can be complex, costly and time consuming with a material impact on ongoing operations.
As a partial solution, the panel have based a number of their recommendations on the scope for the resolution regime to solve a number of the issues which ring-fencing was designed to address.
The recommendation of most interest to the larger complex banks and those approaching the £25 billion threshold will be the introduction of a new exemption for banks which do conduct excluded activities, but do not reach a certain threshold (in effect, a sub-regime, permitting them to avoid the administrative burden of the requirements provided they stay below that – unspecified - threshold).
However, the panel goes further by suggesting that the authorities should have the power to agree (on a case-by-case basis) that banks who are deemed “resolvable” do not need to be subject to ring-fencing. From an operational perspective, for those complex banks who currently have to administer the governance requirements and arms’ length agreements between their ring-fenced and non-ring-fenced banks, that could be a blessing.
However, the complexities of what constitutes a resolvable bank are unlikely to be easy to define. There is now a real opportunity for HM Treasury to review the impact of the two regimes together and identify any required changes prior to the June 2022 deadline for the banks to make public disclosures on their resolvability. There is also a case for assessing whether, if full operational resilience is achieved by a complex banking group, would – or should - they ever not be resolvable?
In addition, due consideration ought to be given to what extent the resolution regime can help map (and eventually mitigate) the uncertainties created by large scale disputes and investigations that can affect banks, including the cross-border aspects of such matters. The issues arising from disputes and investigations could also have a material impact on counterparties that are critical to the resolution plan. These are issues that could be part of the “gaps” that are expected to be identified when banks make their public disclosures in June 2022.
If you would like to discuss any of the above, please contact Emma Clark, Angela Greenough, Kushal Gandhi or your regular CMS contact.