ICB Ring Fencing will make the UK’s ‘Big 5’ less competitive in International and Private Banking in particular and possibly all banking



It is about 18 months since HBW wrote about the Independent Commission on Banking (ICB) recommendations on Ring Fencing and since then considerable clarity has been established.

  • The primary legislation has been drafted and is now moving to the second chamber for approval (expected December 2013).
  • The secondary legislation has been drafted and is out for consultation with a view to approval by May 2015.
  • The Parliamentary Commission on Banking Standards (the follow on commission to the ICB on discovery that banks had been even more naughty than previously thought) grudgingly endorsed the ring fence.  They would have preferred complete separation of Investment and Retail Banking but did not want to take the ICB back to the drawing board so has looked to add measures to ‘electrify’ the Ring Fence in the existing primary and secondary legislation processes.

From a banking IT and Operations point of view some of the key learnings from this period are

  • This legislation only really affects Barclays, HSBC, RBS, Santander UK and Lloyds[1].
  • HBW was wrong 18 months ago and that the Ring Fence separation programme will end up being a truly colossal programme in these organisations.
  • That these five banks will be far less competitive in certain markets than they previously were.

The first statement derives directly from the “de minimis” size requirements of the ICB legislation.  The other two sentences need explanation and are the subject of the next two sections.

ICB Ring Fencing is a huge IT and Operations programme

Both Bankers and Regulators had been thinking of ICB Ring Fencing as an essentially re-aligning exercise; that markets and International customers and their activities would go to the Non Ring Fence half and the UK Retail and SME customers would go to the Ring Fenced Bank.  Whilst this will be true for very large numbers of customers there are two factors that really complicate the implementation;

1)    A sizeable customer population do not sit neatly in one half or the other.

2)    Inside the Big 5 banks there is a high degree of sharing of IT, Operations, legal entities and Group Departments between what will be in both the Ring Fence Bank and Non Ring Fenced Bank.

The second of these causes most of the cost of the implementation.  The Big 5 banks have been following strategies of centralisation over many years with the aims of achieving economies of scale and more control.  Areas of complex IT and organisational design work that will almost certainly be needed by the Big 5 are;

  • Moving customers and accounts between banking legal entities; (the Ring Fenced Bank and Non Ring Fenced Bank will be different legal entities).  This will vary by product type/platform type.  Some platforms might be easy to split up into new legal entities but many require major IT re-engineering; also the customer communication is non trivial.
  • Many Group functions (Risk, Treasury, Finance, HT-performance) are obliged under the ICB legislation to be independent in the RFB from the same function in the NRFB.  Independent here means
    • Separate Staff and Governance
    • Independent Policies and risk appetites
    • The Ring Fenced Bank must not be dependent on the NRFB in terms of systems or staff.

This almost inevitably means some level of duplication and separation of systems and teams.

The Big 5 will lose competitiveness

All the distraction of resources and management attention that creating the Ring Fence Separation illustrated above will mean that management and resources cannot be dedicated to improving customer service, innovating, developing new products and services etc.  Additionally, there are a number of customer segments and propositions where the current Big 5 are particularly well placed to compete; for example;

  • Small and medium UK corporates (e.g. chains of shops) that need both access to large scale cash and cheque handling (e.g. Branch network) and sophisticated capital markets products such as Forex cap and collar derivatives.
  • International companies that have an important trading relationship with UK (e.g. a US company subsidiary in the UK).
  • High net Worth Individuals who are based in the UK but also have activities in other parts of the world (e.g. Channel Islands, Switzerland or Asia).
  • Foreign Banks, Insurance Companies and Investment Funds (London is a major financial centre) who need both access to UK domestic payment systems as well as complex banking services.

The Ring Fence in the Big 5 will generally cause these types of customer to have to deal with two banks; the Ring Fenced Bank and Non Ring Fenced Bank in order to get the same range of services and they will not be able to get them under the same favourable circumstances;

  • No ability to share collateral across the different products and services
  • Obtain a total relationship priced arrangement.

Competitors of various types now have relative advantages;

  • Small UK niche players (e.g. small UK private banks such as Close Brothers) can still provide both onshore and offshore banking in one relationship.
  • Non UK Global players (e.g. Deutsche Bank, JP Morgan and UBS) could compete on a more even footing for the Investment Banking activities with the NRFB parts of the Big 5.
  • Smaller UK retail banks can compete with the Big 5’s Ring Fenced Banks on a more direct basis and without extra capital requirements of the Big 5.

All in all, life is going to get much harder for RBS, Lloyds, Barclays, HSBC and Santander UK.

[1] The other UK incorporated Banks are not very affected; The “de-minimis” requirement of £25Bn core deposits mean National Australia Bank, Standard Chartered are excluded others (not enough UK core deposits to matter); Co-op and Nationwide are big enough but are effectively Retail only banks anyway (Building Society in the case of Nationwide) and so don’t have activities to put in a Non Ring Fenced Bank.