Ring-fencing white paper leaves questions unanswered
The government’s recent White Paper concerning the implementation of the recommendations of the Vickers report on banking reform has drawn much comment in the market.
Some, including Sir John Vickers, have criticised the White Paper on the basis that on some points it does not go far enough. In particular, much of the criticism has centred on the government’s rejection of the recommendation to permanently increase the minimum leverage ratio beyond the Basel III international standard for large, ring-fenced banks.
At the moment it is quite difficult to get a complete picture of the government’s proposals. For instance, the actual perimeter of the ring fence is by no means certain. A ring-fenced bank will only carry out so-called ‘mandated services’ and be prevented from carrying out ‘prohibited services’. The government has stated that the only activities that will be defined in primary legislation as a mandated and prohibited service will be, respectively, accepting deposits and dealing in investments as principal. However in both cases the government has stated that it will be given the power in secondary legislation to define other types of mandated and prohibited services.
The mandated service of accepting deposits is limited to deposits from individuals and small and medium-sized enterprises. The White Paper discusses two exceptions to this based on a mandatory threshold. For SMEs, the threshold for mandatory inclusion in a ring-fenced bank will be based on annual turnover using the current definition under the Companies Act 2006. For individuals the government believes that the threshold for exemption will be between £250,000 and £750,000 of ‘free and investable assets with a single bank’. However, at present, the government has not yet defined what ‘free and investable assets’ actually are.
There are also a number of operational and legal questions still unanswered. For instance, the White Paper stated that where the operational infrastructure of a banking group presents a barrier to the separation of a ring-fenced bank, the regulator should require banks to make “appropriate changes to their operations”. This phrase has huge operational significance and banks will need to think very carefully concerning contractual relationships and the outsourcing of group services. It appears to me that banks will need to show that there is sufficient independence in their operations to be able to genuinely say on a default of the rest of the group that the ring-fenced bank could carry on.
Banks will need to show that there is sufficient independence in their operations to be able to genuinely say on a default of the rest of the group that the ring-fenced bank could carry on.
Simon Lovegrove is a lawyer with the financial services group at Norton Rose