Ringing the changes

Written by: Phil Thornton Posted: 21/03/2019

BL61_Banking reformsAfter being excluded from a new protective ring fence around retail banking activities, Channel Islands branches and subsidiaries eye up the resulting opportunities

A decade after the rescue of a number of UK banks, the collapse of Lehman Brothers and the worst recession for generations, the financial sector is entering a new era of regulation.

Since 1 January, the UK’s five largest banks have had to put their high-street operations behind a ‘ring fence’ to keep them separate from riskier capital markets activities. The change was central to a reform programme based on a report into the industry by the Independent Commission on Banking (ICB), chaired by Professor Sir John Vickers. 

Having used £500 million of taxpayers’ money to stabilise the system, the government was determined to end the problem of banks being ‘too big to fail’ by isolating and protecting services where continuous provision, such as high-street banking and cash machines, was critical.

The UK parliament legislated to create a ring fence, with each bank keeping retail operations separate from investment banking with their own boards, balance sheet and regulatory obligations. Ring-fencing applied to banks with more than £25bn of retail deposits, so it embraced Barclays, HSBC, Lloyds Banking Group, Royal Bank of Scotland (RBS, including NatWest) and Santander.

Island exception

The ICB had not considered the case of the Channel Islands branches or subsidiaries of the big five. As Sir John told Businesslife: “The ICB didn’t examine the issues affecting the Crown Dependencies. That came up later in the [government] consultation.”

Originally, there was a prospect that Channel Islands branches might be permitted inside the ring fence, but eventual government policy only allowed business activities inside the European Economic Area to form part of it. 

Those banks affected by the new rules and which had Channel Islands operations had to ensure that these operations were no longer held within the UK unit that would be inside the ring fence. All five affected clearing banks had a unit in Jersey, while in Guernsey the banks affected were the big five minus Santander.

Wendy Benjamin (pictured below), Managing Partner of the Jersey and Guernsey offices of law firm Appleby, which also has operations in the Isle of Man, says one of the factors that contributed to the Crown Dependencies being outside the ring fence was the difference in the way the depositor compensation schemes operated in the UK and on the islands. 

“It would have been quite complicated to make them entirely compatible with UK ring-fencing and recovery and resolution legislation,” she explains. “Anecdotally, we heard they were unable to find a satisfactory position ahead of the UK legislation.”

Moving branches and subsidiaries outside the ring fence have been large transactions. “We have moved about £50bn worth of deposits from one part of a bank to another part in the past six years,” Benjamin says.

WendyBenjamin_Appleby 2018Legal process

The legal process that moves the deposit-taking business from one part of a bank to another must be approved in court, which requires the bank to carry out an impact analysis and set out how any negative effects of this change will be mitigated. 

Benjamin says this included her banking clients having conversations with their customers who were worried or needed more information about the effects of the court-sanctioned scheme on their day-to-day banking requirements. 

These worries included knowing that their bank accounts would continue to operate as before, such as with the same sort code and account number, whether they would suffer any negative financial impacts, and whether or not the services they enjoyed would remain in place after a restructure. All clients needed to receive proper notice of any likely changes arising as a result of a restructure.

“That needs a lot of careful handling to make sure [the banks] are treating customers and other stakeholders such as employees fairly and that any impacts are mitigated,” Benjamin explains.

In the case of RBS, its UK and Irish personal and commercial banking activity was placed inside the ring fence, while its investment banking and RBS International (RBSI) business in the Channel Islands were positioned outside of the ring fence.

Peter Softley, RBSI’s Director, Strategic Regulatory and Business Planning, and the bank’s ring-fencing lead, says this type of transfer involved major restructuring across all the large UK banks with operations in the Crown Dependencies. “The biggest change for the industry was rearranging its programme of operations so that it could position customers on the right side of the ring fence.”

For RBSI, this meant migrating customers from other parts of RBS into new branches of RBSI, which is headquartered in Jersey. This migration mainly involved corporate customers, especially fund sector clients, who previously had accounts with RBS in London and Luxembourg. (The bank is a major provider of services to the funds industry.) This often involved giving them new sort codes and account numbers, as well as undertaking other operational changes, such as building payment redirection capability to support the automatic routing of payments to customers’ new accounts. 

It also inherited two depository businesses in Luxembourg and the UK that are focused on the funds sector. Softley says while the cost was “pretty significant”, the bank was determined to “make a virtue out of necessity”.

By pooling the majority of its funds activity in one place, it would improve the customer experience compared with the previous model that served customers across multiple cash management and banking platforms. “We now offer a more consistent level of experience and customers are pleased they now have a single platform, whether they’re based in the Channel Islands, Luxembourg or the UK,” he says. “We have tried very hard to minimise the disruption and look at opportunities to improve the overall offering to customers.”

Balance sheet changes

Softley says that as part of the restructuring, RBSI has had to change how it manages its balance sheet. Previously, surplus deposits were lent on to other RBS entities. Now RBSI manages its own liquidity portfolio and has invested in high-quality government bonds, it places money with the European Central Bank and Bank of England, and has also increased its lending to the funds sector – an important component of its Channel Islands operations since they were established in 1996.

“We recognise the growth potential in the funds sector, so we are prepared to invest in the customer proposition as well as undertaking further lending,” he says. “We will continue to work closely with fund customers to understand not only their current needs, but also what they might need over the next five to 10 years.”

There is little sign that clients have been deterred from putting money into the Channel Islands because of concerns that their deposits could be bailed-in as part of a rescue of a parent bank. 

Figures from the Jersey Financial Services Commission (JFSC) show total deposits rose from £107bn in June 2016 to £121bn exactly two years later. The net asset value of regulated funds under administration grew by 14% on the year to stand at £301.7bn at 30 September 2018 – a record high, according to the JFSC. 

Benjamin says: “The Crown Dependencies are seen very much as safe havens during turbulent times and are still big deposit takers.”

Geoff Cook, the former Chief Executive of Jersey Finance, points out that Jersey’s government tightened financial regulation, introducing a recovery and resolution regime. “We didn’t have any failing banks as ours were capitalised more strongly, but, in line with the G20 and central banks’ coordinated approach to the crisis, we adopted this measure, improving protection for savers under the Depositors Compensation Scheme,” he says. 

Over the past 12 years, the number of licensed banks across the Channel Islands has dropped from 48 to 26. However, Benjamin puts that down to consolidation in the wake of the global financial crisis rather than as a result of being excluded from ring-fencing and therefore still being vulnerable to failure.

Cook says the decision to keep the Channel Islands outside the ring fence raised questions about the future potential role of the local banks. The key challenge was how the banks would use the deposit finance now that it was not transferred to the parent banks in the UK – or ‘upstreamed’, in the technical jargon.

Benjamin says: “You have fewer, but bigger, banks expanding the range of services they offer, so rather than just taking deposits and upstreaming them to parents in the UK, they are now looking for more commercial opportunities outside the islands and developing new streams of financing.

“During this period of transition, there are some really positive opportunities for banks and we will see more autonomy in the islands as they develop new products.” 

One of those opportunities is to provide finance to commercial and international banks outside the ring fence that are looking for less volatile finance away from wholesale markets and short-term funding.

Bright future

When the ring-fencing legislation was originally released, there were fears that it would bring negative changes and potentially significant job losses. 

Softley says that now the banks have dealt with the issues of not being included in the ring fence, the future is bright as banks focus on using the money that’s no longer being sent back to parent banks in the UK to boost business in the Channel Islands funds sector.

Looking ahead, it means that, with most of the regulatory changes complete, banks are better placed to take on the next wave of challenges, such as the impact of technology and artificial intelligence. 

Softley adds: “From a Channel Islands and RBSI perspective, we’ve tried to embrace the change and to look at how we can do more.” 


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