Joy Macknight

The UK government has announced plans to review the bank ring-fencing regime, with the intent to make it simpler and more adaptable. But is this a path to deregulation and divergence with the EU?

UK chancellor Jeremy Hunt’s decision to revisit the bank ring-fencing regime as part of his financial regulation reform agenda – the so-called ‘Edinburgh Reforms’, lauded by pundits to be the biggest overhaul in three decades and seen as a ‘Brexit dividend’ – has received a tepid response from the banking community.

However, it came as no real surprise as a week before UK City minister Andrew Griffith, speaking at the FT/The Banker Global Banking Summit, indicated that this was one of the regulations under review.

The ring-fencing rule, which requires UK banks with more than £25bn in deposits to legally separate their retail banking operations from the more risky wholesale and investment banking operations, came out of recommendations from the 2011 Independent Commission on Banking (ICB), led by former chief economist of the Bank of England Sir John Vickers, following the global financial crisis.

The rule was aimed at improving financial system stability by making banks safer and making it easier to sort out banks that get into trouble. It was introduced in 2015 in spite of bank opposition and came into force in 2019. Those in scope of ring-fencing are Barclays, HSBC, Lloyds Banking Group, NatWest, Santander UK, TSB, and Virgin Money.

Six years in the making, costing billions and creating a huge organisational headache for the banks involved, the ring-fencing regime may now be unwound. The government plans to consult the industry in early 2023 on several recommendations from an independent review, including:

  • Removing those banks without major investment banking operations;
  • Reviewing the deposit threshold; and
  • Aligning the ring-fencing and resolution regimes.

Unsurprisingly, after going through all the pain to get it done, the UK banking industry doesn’t seem to be clamouring for its repeal.

In a straw poll of The Banker’s LinkedIn community, which includes banks and non-banks, almost half (49%) of the 84 respondents were against relaxation of the ring-fencing rule, while 37% thought that it should be lessened “to some degree”. Only 14% voted for a complete repeal of the regulation.

So why roll it back now? According to the chancellor, reforming ring-fencing is all part of the drive to “turbocharge” growth and competitiveness in the UK financial services sector, and is just one of 30 regulatory reforms the government has planned for the sector because of “our regulatory freedoms outside of the EU”.

However, there are concerns over the two ‘Ds’: deregulation and divergence.

On deregulation, Dr Angela Gallo, senior lecturer in finance at the Centre for Banking Research at Bayes Business School, says: “…this political decision seems to have little to do with fixing the financial system or ensuring financial stability. These were the main arguments behind many of these reforms in the aftermath of the financial crisis, but this seems to have more to do with a wish to deregulate.”

She warns, “Deregulation, unless carried out with a clear objective, can be dangerous.”

On the topic of divergence with the EU, Isabelle Jenkins, financial services leader, PwC UK, says that firms will need to ensure they continue to have one eye on “costly divergence”, as banks operating in both jurisdictions will have to address potentially conflicting regulations.

Ms Jenkins also raises the risk of overly ambitious timelines. “As the UK enters another period of regulatory change, it will also be important that the government gives the industry as much certainty as possible, at the earliest point,” she says.

The government needs to tread its path carefully and with great consideration to ensure that the UK maintain its position as one of the world’s leading financial hubs.

Joy Macknight is editor of The Banker. Follow her on Twitter @joymacknight

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