Almost one million retail and corporate banking customers could see changes to their sort codes as banks move to implement 'ring-fencing' reforms to the sector, according to the Prudential Regulation Authority (PRA).

In a speech last week (7-page / 238KB PDF) to the British Bankers' Association, PRA executive director for UK deposit takers supervision James Proudman said the reforms will have cost the banking sector "several billion pounds" by the time they take effect in January 2019.

From 1 January 2019, UK banks that take in more than £25 billion in 'core' deposits from individuals and small businesses will be required to formally separate their deposit-taking activities from their riskier investment banking activities, as recommended by the Independent Commission on Banking chaired by Sir John Vickers in 2011.

Affected banks have to 'ring-fence' these core functions into a legally and operationally distinct entity, which will not be able to hold or own the capital of entities "associated with trading and financial interconnectedness" of the wider banking group.

Proudman revealed in his speech the extent of the impact on banks. He said by 2019 the PRA expected to have authorised the three largest new banks ever created in the UK.

He added that simply separating banks into distinct legal entities would not be enough to ensure they conducted business in a way that protected core banking services. Proudman said strong arrangements were needed at board level to ensure the banks could take independent decisions in times of crisis and protect the ring-fence's integrity in good times.

"The ability to act independently does not stop at board level, but to be effective needs to permeate

throughout the organisation," Proudman said. "Banks' IT systems, not always easy to change even at the best of times, need to be re-configured to enable the ring-fenced banks' financial ledgers to be distinct. And transactions and services (including HR, property, security etc.) across the ring-fence need to be negotiated on arms' length terms."

He said banks would need to allocate accounts to one side of the ring-fence or the other, and had put in place "major programmes" to ensure customers found themselves on the right side. Banks would need to inform customers if their sort codes were changing.

Some banks would also need to move assets and liabilities of "significant" numbers of customers from one legal entity into another, said Proudman. This will take place through a ring-fencing transfer scheme which is approved through a court process. The first hearings are expected to start later this year.

The PRA is currently considering how to supervise banks with ring-fenced structures. This may require changes to its current approach and operating model.

In 2015 the PRA said it was finalising the legal structure and governance arrangements for ring-fencing early to allow banks time to implement the changes.

Proudman said constructing the banking ring-fence was "a critical infrastructure project" which would contribute to a "safer, more resilient and more resolvable" banking system.

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