Banks set for clash with UK regulator over ringfencing rules

Bankers are gearing up for a face off with the Bank of England over the future of the UK’s ringfencing law, with parts of the industry lobbying to ease restrictions clashing with regulators insisting they be maintained.

Concerns about the rules, which require the separation of retail and investment banking divisions, have heralded an unusual alliance of banks from Wall Street giant Goldman Sachs to high street lenders such as Metro Bank.

The debate is set to intensify after the UK Treasury kicked off a review of the 2013 law last week. It is led by former Standard Life Aberdeen chief executive, Keith Skeoch, with a panel including ex-HSBC CEO John Flint. They report back to Chancellor Rishi Sunak in a year.

Ringfencing formally came into effect in 2019. It requires lenders to firewall their retail operations from investment banking arms to protect consumers from the big trading losses and taxpayer bailouts of the financial crisis.

Foreign banks argue the current set-up inhibits growth and inward investment to the UK, while smaller companies worry that higher costs and unintended knock-on effects have damaged competition, according to people familiar with their thinking.

Keith Skeoch, joint CEO of Standard Life Aberdeen, is leading a review of ringfencing © Bloomberg

Their stance is opposed by the BoE. The regulator continues to view ring fencing as a vital protection for taxpayers against the excesses of investment banking, and a tool to ensure robust compliance and risk procedures, said people familiar with its thinking.

The demands kick in when a bank exceeds a threshold of £25bn of retail and small-business deposits over three years. The process is costly and requires the creation of an independent board, a host of new compliance measures and increases funding costs for banks’ wholesale divisions by denying them access to cheap retail deposits.

Some bankers are optimistic that in the current post-Brexit and ultra-low interest rate environment, politicians might consider softening the law amid concerns about London’s competitiveness on the international stage and pressure on lenders’ profit margins.

The issue is of particular significance to Goldman. After founding a new UK retail bank called Marcus in 2018, it quickly grew to near the £25bn deposit ceiling and had to stop taking new customers. 

Goldman uses the deposits to help cheaply finance its London-headquartered international investment banking operations, a practice that would be banned if it had to ring fence the unit. Goldman declined to comment.

Goldman Sachs’s international investment banking operations are headquartered in London © Jason Alden/Bloomberg

Bankers will focus lobbying efforts on increasing the deposit threshold to £40bn to account for the UK’s economic growth in the past eight years, according to a person involved. Others argue that the ceiling should be raised far more to allow for future GDP growth and encourage them to invest more in the UK.

The regulator’s position, however, is that at or around the current deposit level is essential in a country where its huge global financial services industry dwarfs its medium-sized economy.

Increasing the ceiling would also benefit JPMorgan, which announced last month it was starting its own UK digital-only consumer bank. A higher deposit threshold would give the US lender more time to grow this business before having to separate it.

“Bankers are marshalling their lobby, of course, but you shouldn’t read into the review itself that anything will change,” said one person familiar with the regulator’s thinking. “Retail banking is very politically sensitive after the last crisis. We will defend ringfencing. I think we will succeed . . . [but] there may be some refinements.”

The BoE declined to comment.

Some bankers would like to see the rule scrapped altogether, but they acknowledge this is extremely unlikely to happen, considering the regulator’s firm opposition and the billions already spent by the likes of Barclays and HSBC to drastically overhaul their operations to comply.

“The fact that some like Goldman are lobbying is not surprising,” said another person familiar with the process. “Are we going to change the rules of ringfencing to suit Marcus? Obviously not . . . [There is] a lack of political will for UK depositors to be exposed to foreign investment banking activity.”

Executives at smaller domestic banks told the Financial Times that the extra costs of ringfencing make it harder for them to organically grow enough to challenge larger rivals. The BoE has also acknowledged challenger banks’ complaints that ringfencing has unfairly “amplified” competition in the mortgage market.

HSBC has been aggressively expanding its market share in the mortgages market, which has helped cause a price war that is putting pressure on
smaller rivals’ profit margins.

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