Victoria Young assesses the approach to implementation of ring-fencing rules
Though the deadline for full implementation is over two years off, the looming threat of so-called ring-fencing reforms is already having a major impact on UK banking groups and their legal teams.
Under rules overseen by the Bank of England, banks with core deposits greater than £25bn will from 2019 need to separate their retail banking function from the rest of their group. The post-Lehman shake-up aims to protect consumers from riskier parts of banks’ businesses, such as their investment arms, and in theory make it easier to contain banking failures.
The reforms impact Barclays, HSBC, Lloyds Banking Group and The Royal Bank of Scotland (RBS), while Santander UK, The Co-operative Bank and TSB Bank are others looking carefully at how the regulation applies to them. The Treasury’s estimate is that ring-fencing will cost the banks £2.5bn to set up and considerable additional running costs.
The importance of this reform was highlighted in March, when it was revealed Lloyds has appointed a head of legal for ring-fencing, Frances McLeman, as the bank asked its panel firms to pitch to advise on the project.
The major banks have engaged a range of advisers from the Magic Circle, as well as City and national firms. HSBC has already instructed Allen & Overy and Norton Rose Fulbright (NRF), while Slaughter and May is acting for Barclays. Linklaters is advising both Lloyds and RBS on the matter. Herbert Smith Freehills (HSF) is working with TSB-owner Banco de Sabadell, which did not submit a ring-fencing plan to the Prudential Regulation Authority as it is currently too small. Santander has also instructed Slaughter and May.
There are also roles up for grabs in what NRF partner Jonathan Herbst describes as the ‘three spot’ – the third-party advisers that will help ensure the transaction gets court approval – and the trustees for banks’ pension schemes will need advisers.
He adds: ‘In theory you could have the individual directors of the bank wanting separate legal advisers, because this links to the Senior Managers Regime [new rules to increase accountability of finance executives] and the issue is how many advisers the banks need.’
While ring-fencing is throwing up a lot of mandates, Herbst says the legislation is now relatively established, so the challenge for teams will be more around logistics and project management.
‘None of it is rocket science or particularly surprising – there’s nothing new. Everything has been set out in the legislation. The challenge is working through it practically.’
Pinsent Masons banking partner Tony Anderson takes a similar view, telling Legal Business the difficulty is now the scale of the ring-fencing project and the method of implementation applied, given that banks are already burdened with high legal and regulatory costs.
‘The “throw bodies at it” approach to legal work is no longer viable from either a cost or a risk management perspective… There won’t be any blank cheques for private practice.’
Tony Anderson, Pinsent Masons
‘The regulatory issues have been explored for a number of years now, but with 2019 approaching, the focus is shifting to the implementation of the required changes,’ he says.
While the blueprint to shake up the banks will vary hugely between institutions, Anderson points out there is a wider regulatory agenda at both UK and European level, which banks are trying to comply with, and interdependent regulatory regimes make the task a ‘tall order’.
‘It’s in this kind of an environment where project management skills will come to the fore, for general counsel, their in-house team and external resource with viable software solutions. Currently, project management and resourcing are the popular buzzwords with external advisers, so banks will need to make sure they have conducted their own careful diligence on who can deliver implementation effectively. They can’t afford to have the wrong solutions for this project.’
Anderson suggests there will be more automation of repeat processes and diligence, and more reliance on freelance legal professionals and other resource to keep costs under control.
He adds: ‘The “throw bodies at it” approach to legal work is no longer viable from either a cost or a risk management perspective… There won’t be any blank cheques for private practice.’
HSF partner Nick Bradbury says the reforms are a ‘gift’ to law firms, and it makes sense for banks to use different firms to ensure cost efficiencies.
‘On the main roles there are huge amounts of heavy-lifting, like giving due diligence. It makes sense to use a regional firm or a law firm with a cheaper charging scheme for more commoditised work.’
For Bradbury, the challenge is that the way the regulation bites is disproportionate for smaller banks.
‘It would be an incomplete picture to say it is only about the big banks splitting up from their investment banking arms, because for other banks there is quite a disproportionate impact on them and it wasn’t what the rules were meant to achieve. It is hard to work out for them what the implications are.’
victoria.young@legalease.co.uk