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UK Banking Regulation ‘Ring-Fencing’

Discuss about the UK Banking Regulation Ring-Fencing.

The banking regulation in the United Kingdom has undergone many significant changes in the current years after the occurrence of the financial crisis. The financial crisis placed emphasis on developing a banking sector in the UK that is able to maintain health and stability. The reforms are mainly introduced in the banking sector of the UK to change its regulatory structure for simplifying the regulation of banks in the UK. In this context, the Prudential Regulation Authority (PRA), a part of Bank of England, has developed a new regulation ‘Ring-fencing’ for separating retail operations from investment banking operations (Vickers, 2011).  The present report in this regard emphasizes on the need of developing ‘ring-fencing’ and its limitations. In addition to this, the report analyses the implementation of ring-fencing in one of the UK bank, such as HSBC, for examining its implications on the customers. Also, the report addresses the challenges faced by the bank in implementing such regulatory changes.

The Prudential Regulation Authority (PRA) has been developed as a part of Bank of England by the Financial Services Act in the year 2012 for developing policies related to prudential regulation and supervision of UK banks. The PRA has developed new policies in relation to the implementation of new regulation in the UK banking sector of ring-fencing. The legislation of ring-fencing is introduced for the purpose of separating the operations of retail banking from investment banking in the major UK banks. This is done for protecting the customer interests by safeguarding the bank daily operations from the risks arising due to failure in their other businesses. The separation of core retail banking operations from other types of banking activities is one of the most important reforms introduced by the UK government for strengthening the UK financial system. The retail banking operations involves managing the savings and current accounts, deposits and personal loans activities of its clients. On the other hand, investment banking operations includes raising funds by sale of securities to the companies and the government (Prudential Regulation Authority, 2016). 

The bank of England is currently placing large emphasis on implementing the ring-fencing rules in the banking sector of the country for improving its ability to withstand the financial shocks. The adoption of such a structure in the banks that will separate retail and commercial activities will reduce the risk for the customers. As such, the regulation of ring-fencing will help in reducing the risks in the main services provided by the banks such as deposits, current accounts, saving accounts and payments. The ring-fencing regulation aims to promote the financial stability in the UK banking sector by improving the resilience of the major banks of the country. It is thus regarded as a major step towards improving the financial system of the UK after the occurrence of the financial crisis. The large banks of the UK by placing the investment and international banking activities at the same level often faces several types of problems. This is the main function of the banks of lending, deposit and payments are put to risk if there occurs some problems in its investment activities such as that occurred during financial crisis (International Monetary Fund, 2016).

Implementation of Ring-fencing Regulation in ‘HSBC’ UK Bank


The ring-fencing regulation will be implemented to the banks that have average deposits of more than £25 billion for more than three years. There are mainly six banks that are subject to implementation of such regulations that are HSBC, Barclays, Lloyds Banking Group, RBS, Santander UK and the Co-operative Bank. The ring-fencing is to be introduced from the year 2019 in the UK banking sector to secure the confidence of the consumers in the banking sector post-crisis. As such, the PRA is currently emphasizing on developing supervision policies for monitoring the banking activities after the development of their ring-fenced structures. The PRA holds the responsibility of examining the extent of compliance of the banks with the ring-fencing provisions and posses the electrification power in case of non-compliance of bank with the new regulations. The electrification power of the PRA enables them to implement structural changes in the banks so that they comply with the ring-fencing regulations. The ring-fenced structures will enable the banks to manage the failure in its investment activities in a proper way without impacting its daily business operations. This in turn will help in reducing the occurrence of the financial crisis in the future and thus strengthening the UK economy (Financial Conduct Authority, 2016).

The central bank is also facing several challenges for the adoption of the ring-fencing regulations in the UK banking sector. The banks have to incur a huge expenditure for implementing the ring-fencing reforms. As such, the increase in the cost for introducing such regulations will have an impact on the money available for lending purposes by the banks. The adoption of ring-fencing structure will also increase the complexity level for the customers as they have to create new accounts for supporting these structural changes. The ring-fencing regulations proposed by the PRA will only be applicable to the large banks of the UK thus creating an asymmetry in the banking sector (Vickers, 2011). The banks that are subject to the implementation of the new regulations will have to restructure their operational activities completely by transforming the structure of their balance sheet and governance system. This will lead to the occurrence of an operational risk in the banking structure if they fail to successfully adopt the proposed changes. In addition to this, the ring-fencing regulations will increase the competition in the banking sector of the UK between the larger banks. Also, there is significant risk of occurrence of fraudulent activities in the banking sector with the changes in the accounts numbers and customer codes. The fraudsters can send emails to the customers for seeking their personal details and thus can gain access to their accounts. As such, it is essential that PRA should work in co-operation with the banks to facilitate communication and thus reducing the chances of occurrence of such risks (Farlow, 2013).

Challenges in Implementation

The HSBC Bank is recognized to be largest banking and financial services provider organization in the world and comprises of 7,500 offices in over 80 countries. It provides variety of services to its customers such as loans, mortgages, savings, investments and credit cards. The HSBC is recognized to be the first bank that has initiated the process of adopting the ring-fencing regulations of the PRA in the UK. The bank has started the process of changing the account numbers and customer codes in order to comply with the ring-fencing rules. However, this has resulted in causing disruption in the customer services due to re-direction of payments and replacement of cards. The HSBC has also provided warning to its customers about the possibilities of occurrence of fraudulent activities so that customers get alert and does not become prone to such frauds. The customers are also require to update the details of their account on their own for the purpose of carrying out online purchases and other such services (Kynaston and Roberts, 2015).

The bank has also predicted that its restructuring is likely to impact about 1 million people across the banking sector. The bank has proposed that under the new regulations it will separate its personal and business customers in the UK by causing changes in its legal entity name from HSBC Bank plc to HSBC UK Bank plc. For this purpose, the customers of the bank in the UK will receive a new international bank account number (IBAN) due to the bank being provided by a unique Bank Identifier Code (BIC). The customers will be provided detailed information about the proposed changes so that they can comply easily with the mentioned changes (Meadows, 2017). The HSBC has also provided sufficient details about the impact of the ring-fencing changes on its retail and investment customers. The retail bank customers include all the personal and commercial customers of the bank in the UK that will be directly affected by the structural changes. The customers bank account number and sort code are likely to change that will cause them problem in their payments. The HSBC bank is also aiming to obtain the permission of High Court for transferring its personal and business customers in the UK to HSBC UK. The compliance with the new banking regulations in the UK will cause the bank to restructure its operations that involves huge time and money. Also, the bank at the same time has to maintain the confidence of its customers in its banking facilities by reducing their inconvenience and helping them at every stage (HSBC Bank plc,  2017).

Conclusion

In addition to this, the HSBC bank is also facing issues regarding the implementation of the new rules in the year 2009 as these are taking place at the same time when the Competition and Markets Authority (CMA) is planning to investigate in the banking industry. As such the bank is asking the government to delay its plan of implementing ring-fencing regulations. This is because the investigation of the banking sector by the CMA will also cause some structural changes and it could recommend some structural cages that can make it difficult for the UK banks to operate under the new ring-fencing regulations. The HSBC is also facing several issues for putting the ring-fencing arrangements in place. This includes gaining funds to meet the increasing expenses of restructuring that means the bank should either increase the prices for their personal and business clients or pulling out the deals where the returns are low (Treanor, 2014).


The bank also needs to develop more international banking relationships for diversifying the sources for raising the funds. The bank also needs to actively work for separating its ring-fenced and non-ring-fenced services as per the new banking regulations in order to ensure that its retail and investment operations are completely independent of each other. In this context, the bank should ensure that its new ring-fenced HSBC UK will provide retail baking services to its personal and commercial customers in the UK. On the other hand, its non-ring-fenced HSBC Bank Plc will provide investment banking services to the global banks and market customers through its wholesale and investment banking division (HSBC 'given licence for ring-fenced UK banking business', 2017).

The challenges discussed above are not only impacting HSBC bank but these issues can be regarded to be sector-specific rather than being banking-specific. The overall banking sector of the UK is facing these issues for complying with the ring-fencing regulations. The ring-fencing regulation is presenting an attractive opportunity to the international banks for gaining presence in the UK banking sector. The European, US and Asian banks are becoming active in the UK banking industry and this will lead to increase in the competition between the domestic and foreign banks. The domestic banks of the UK are largely facing pressure to comply with the new regulations and as such the rise in competition by the foreign players will further impact their growth and development. The foreign banks have an undue advantage of offering cheap banking services to the UK customers as these are not impacted by the ring-fencing rules (Reilly, 2017).

Thus, it can cause the increase in the market share of the foreign banks in the banking industry causing potential problems for the domestic banks of the UK. The banking sector of the UK is also faced with the challenge of protecting the customers from the possibilities of occurrence of fraudulent activities. The banking industry as such is required to work in integration with each other to promote awareness among the customers about the numerous frauds that can occur with the structural changes imposed in the banking sector. The PRA should work in co-operation with the banking sector so that they can successfully comply with the new banking regulations. This will help the banks to avoid the occurrence of financial crisis and maintain stability in their operational activities. However, it is essential for the government to make proper arrangements such as improving the loss-absorbing capacity of banks and outlining a structural plan so that they can successfully implement the ring-fencing structural regulations (Bank ring-fencing reforms to affect one million customers, 2017).

Conclusion

Thus, it can be summarized form the overall discussion held in the report that ring-fencing regulation of the PRA aims to impose higher standards of conduct in the UK banks. The reform is introduced with the objective of improving the financials stability of the UK banking sector after the occurrence of global financial crisis. The ring-fencing regulation is planned to be adopted by the UK banks from the year 2019 that will require the banks to separate their retail and investment banking operations. The ring-fencing regulations will be implemented in the major banks of the UK such as HSBC and Barclays who satisfy its threshold criteria. The HSBC is recognized to be the first bank to initiate the structural changes by developing a new legal entity known as HSBC UK for complying with the ring-fencing regulations. However, the HSBC is facing several challenges for restructuring its baking activities as per the new rules. The bank is required to maintain the trust of its customers and also have to meet the significant expenses caused in its restructuring. The challenges that are faced by HSBC banks for complying with the ring-fencing regulations adequately is not only limited to a specific bank but impacts the overall banking sector of the UK. As such, all the large banks of UK should work in integration in order to successfully comply with such reforms and prevent the entry of foreign banks in the UK banking industry.

References

Bank ring-fencing reforms to affect one million customers. 2017. [Online]. Available at: https://www.out-law.com/en/articles/2017/june/bank-ring-fencing-reforms-to-affect-one-million-customers/ [Accessed on: 26 October 2017].

Farlow, A. 2013. Crash and Beyond: Causes and Consequences of the Global Financial Crisis. OUP Oxford.

Financial Conduct Authority. 2016. Ring Fencing. [Online]. Available at: https://www.fca.org.uk/consumers/ring-fencing [Accessed on: 26 October 2017].

HSBC Bank plc. 2017. UK Ring-fencing. [Online]. Available at: https://www.hsbc.co.uk/1/2/ringfencedbank [Accessed on: 26 October 2017].

HSBC 'given licence for ring-fenced UK banking business'. 2017. [Online]. Available at: https://www.belfasttelegraph.co.uk/business/news/hsbc-given-licence-for-ringfenced-uk-banking-business-35905308.html [Accessed on: 26 October 2017].

International Monetary Fund. 2016. United Kingdom: Financial Sector Assessment Program-Financial System Stability Assessment. INTERNATIONAL MONETARY FUND.

Kynaston, D. and Roberts, R. 2015. The Lion Wakes: A Modern History of HSBC. Profile Books.

Meadows, S. 2017. HSBC changes 170,000 customers' sort codes: what you need to know. [Online]. Available at: https://www.telegraph.co.uk/personal-banking/current-accounts/hsbc-change-170000-customers-sort-codes-need-know/ [Accessed on: 26 October 2017].

Prudential Regulation Authority. 2016. The implementation of ring-fencing: reporting and residual matters – CP25/16. [Online]. Available at: https://www.bankofengland.co.uk/pra/Pages/publications/cp/2016/cp2516.aspx [Accessed on: 26 October 2017].

Reilly, A. 2017. LPC-UK banks face loan ring-fencing challenge. [Online]. Available at: https://www.reuters.com/article/ringfence-loan-loans/lpc-uk-banks-face-loan-ring-fencing-challenge-idUSL8N1MA62U [Accessed on: 26 October 2017].

Treanor, J. 2014. HSBC chairman calls for halt on rules ringfencing high-street business. [Online]. Available at: https://www.theguardian.com/business/2014/aug/03/hsbc-chairman-douglas-flint-calls-halt-rules-ringfencing-high-street-business [Accessed on: 26 October 2017].

Vickers, J. 2011. Independent Commission on Banking final report: recommendations. The Stationery Office.

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