UK: PRA Puts Ring-Fencing In Industry's Court

Last Updated: 14 October 2014
Article by Clifford Smout and John Andrews

Most Read Contributor in UK, August 2017

The Prudential Regulation Authority's (PRA's) first consultation paper on UK bank ring-fencing puts the ball back in industry's court, holding back from extensive prescription in favour of an approach which gives banks some leeway to tailor solutions to their business models. In most areas there will not be a 'one size fits all' approach, and the onus will be on individual banks to demonstrate how their plans comply with legislation and the PRA's objectives.

The paper confirms the PRA's approach along a number of dimensions, though few components will strike seasoned ring-fence watchers as entirely new or unexpected. While the paper does not provide all the answers to the many open questions which remain, it does provide a set of parameters within which firms can undertake further work. The process of implementing ring-fencing will be evolutionary, and despite asking for preliminary plans to be submitted by the turn of the year, the PRA recognises that those plans may change as it provides further details of the regime.

PRA rules provide the third layer of detail designed to transform ring-fencing from high level policy to a practicable framework, following finalisation of the Banking Reform Act in December 2013 and several pieces of secondary legislation in summer 2014. Uncertainty about the PRA's stance on design-critical issues such as governance frameworks, sibling structures, and shared services had made further planning difficult, but some of that uncertainty has now been eliminated.

Given that many UK banks over the £25 billion deposit threshold have been engaged in some degree of planning over the last few years, the three month deadline to produce provisional plans should be manageable. But it will necessitate a transition in banks' planning from the exploration of options to the taking of decisions. These plans will need to include anticipated legal and operating structures, with provisional balance sheets and profit and loss statements, as well as clear project governance arrangements. And although January's submissions will be preliminary, the 1 January 2019 implementation deadline means that they cannot be preliminary for too much longer. The journey to ring-fencing will likely be long and arduous, but the PRA's new paper provides a firm push forward.

The paper should also be read in conjunction with the PRA's new discussion paper on operational continuity in resolution, although the focus of what follows is on ring-fencing.

Sibling structures

The PRA confirmed that banking groups subject to ring-fencing will be expected to operate a 'sibling' structure: ring-fenced banks (RFBs) will not be permitted to own entities which carry out excluded activities, and vice versa. Banks will therefore need at least two 'subgroups' – one with a RFB, and one with excluded activities – which would sit under a holding company.

Independent governance

At least half of a RFB's board, excluding the chair, must be independent non-executive directors (NEDs), while no more than one third of its board members may be current employees or directors of other group entities. Again, these are expected outcomes, but there are several new pieces of detail:

  • The chair of an RFB must be independent during his or her tenure as chair, and must not chair any entity elsewhere in the group;
  • An RFB executive board member would not be permitted to hold executive directorships at any entity in the group that carries out excluded activities;
  • An RFB executive director would still be able to hold executive positions in the parent entity;
  • An RFB must have its own risk, nomination, audit and remuneration non-executive board committees.

One particular area of interest to industry has been how board members of the RFB will manage their duties towards the RFB and their parallel duties under company law to their parent companies. This is a problem industry will have to solve on its own – the PRA says simply that RFBs must set out "arrangements to identify and manage" any such conflicts.

It is important to note that there may be some flexibility with respect to governance arrangements, depending on the relative size of the RFB in relation to its wider group. The PRA does not commit to granting waivers or modifications of the rules in any particular circumstances, but makes it clear it is open to applications for waivers or modifications in some situations. Some of the above requirements may create challenges for a number of banks subject to ring-fencing in the absence of such flexibility. These firms will want to gain clarity on the PRA's approach sooner rather than later.

Risk management and internal audit

An RFB must have sufficient risk management and internal audit resources "identifiable as dedicated to it". However, the intention "is notto restrict the cross-utilisation of resources", but rather to prevent dependencies from arising. Systems and resources could therefore be shared with other parts of the group, while risk and internal audit could still operate within the lines of group policies. However, RFBs will need their own heads of risk management and internal audit – these senior personnel cannot be shared, and will be prohibited from being in charge of those functions in any other group entity. This is clearly another area in which some firms will want to explore the PRA's openness to waivers and modifications.

The Chief Risk function and Head of Internal Audit are both Senior Management Functions under the PRA and FCA's new Senior Managers Regime (SMR). It is notable that the PRA has reflected on how ring-fencing interacts with the SMR, and proposes to introduce a new 'prescribed responsibility' for RFB Senior Managers making them responsible for ensuring compliance with ring-fencing in their area of the business. As with the SMR in general, this puts the onus squarely on the individuals in question to take reasonable steps to prevent breaches, and to make sure those steps are documented.

Continuity of shared services

The PRA's aim is not to sever all ties between ring-fenced and non-ring-fenced parts of the group – it is simply to make sure the RFB is not dependent on the fortunes of other group entities. And when it comes to the continuity of shared services, resolvability is the main driver, making the PRA's new discussion paper on operational continuity in resolution (published simultaneously with the ring-fencing consultation) essential reading.

The PRA is not looking to force banks to duplicate services such as data processing, IT, or back office functions, on each side of the ring-fence. This means that services and infrastructure can be shared across the group. However, an RFB may only receive shared services from an entity within its own subgroup, or from a "dedicated intragroup service entity" (also known as an 'OpSub'). An OpSub need not sit within the RFB's subgroup, so long as expectations for operational continuity in resolution can be met. In general, an RFB need not actually own and manage all the services which it requires, so long as the arrangements meet the general requirements of the regime, such as insulation from insolvency of other group entities.

Open questions

There are several issues which the PRA has left for future consultations. These include:

  • The framework for intragroup transactions and exposures, including for payments;
  • The size of the large exposure limit to be applied to the relationship between the ring-fenced and non-ring-fenced parts of the group – a range is being considered, of between 10% and 25% of the capital of the RFB;
  • The application of prudential requirements to an RFB's 'subgroup', where this subgroup contains other entities;
  • Disclosure and reporting requirements; and
  • Exemptions to the requirement that RFBs be direct participants in interbank payment systems.

The PRA did not specify how many more consultations will be issued in order to deal with these open issues, and nor did it set out timelines for providing the additional information.

This first CP is open for comment until 6 January 2015, which also serves as the deadline for submission of the preliminary plans, which the PRA says will be used "to help the PRA and FCA decide the approach to implementation." On that account, we might expect further details to begin emerging in spring next year.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.