Student No- C1452121

Module Code- CLT206

Module Title- International Banking Law

Module Leader- Mr. Howard Johnson

Essay Title- The ring fencing of a bank’s retail banking

services from their more risky investment, wholesale and

proprietary banking activities, scheduled to take place in

2018-19 is the last and most necessary reform of the UK

banking system to prevent a recurrence of a major financial

crisis like the one that occurred in 2008-10”

Word Count- 4,765 words

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International Banking Law

‘The ring fencing of a bank’s retail banking services from

their more risky investment, wholesale and proprietary

banking activities, scheduled to take place in 2018-19 is

the last and most necessary reform of the UK banking system

to prevent a recurrence of a major financial crisis like

the one that occurred in 2008-10”

Critically assess the above statement.

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I would like to begin this paper with a brief introduction

of the credit crunch started in the year 2008 and how it

prompted the Government of countries like USA, UK and EU to

revamp their banking structure in order to avert another

financial crisis. In the second part of the paper, I would

like to consider the system of Ring-fencing as suggested by

the Vickers Commission in the UK, its advantages and

disadvantages, whether it is the last and most necessary

reform which could avert another financial crisis. The

system of ring-fencing may not be the answer to prevent a

reoccurrence of a financial crisis of 2008.

INTRODUCTION

The financial crisis of 2008 and its aftermath are still

fresh in the memories of the general public. The Credit

crunch originally began in USA its tremors were felt

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throughout the world. The brunt of the financial crisis was

mainly borne by the investment banking sector in the United

States of America. Lehman Brothers, one of the famous

investment banks filed for bankruptcy on September 15, 2008

in the United States, which immediately exposed many other

investment banks in United States which almost led to the

collapse of the American economy. The administration

quickly stepped in to stop the collapse economy and also

announced bailout packages at the expense of the treasury

to a number of banking entities.

It is submitted that none of the banking entities failed

during the heights of the credit crunch of 2008 in the UK,

however in the year 2007 there was a rundown on Northern

Rock, a bank mainly operating in the retail sector within

the jurisdiction of United Kingdom. In addition to the

crisis at Northern Rock the British banking scene was hit

by a slew of scandals such as the Libor misquoting issue,

the mis-selling of PPI and interest rate swaps to name a

few. The reputation of the bankers and the banks had

reached its lowest ebb amongst the general public.1 The

newly elected Conservative led coalition government was

supposed to convene an Independent Commission on Banking,

however due to the serious nature of the banking scandals

at the forefront, the government requested the

1 Alastair Hudson The Law of Finance, Sweet and Maxwell (2nd Edition2013 Page 881)

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Parliamentary Commission on Banking Standards to suggest a

legislative change.2

In the year 2010 the Coalition government in the UK

commissioned a report from the Independent Commission on

Banking under the leadership of Sir John Vickers. The final

report which is famously called as the Vickers Report was

submitted in September 2011.3 The Independent Commission on

Banking headed by Sir John Vickers recommended to impose a

ring-fence which was akin to the legal separation of

banking activities existing in United States in the 1930s

and which was also applied to the banking activities in

post-war Japan in the 1940s, however there is no conclusive

proof that such legal separation could prevent a banking

crisis.4

The Vickers Report pursuant to studying the existing

banking structure in the United Kingdom made some important

recommendations. The following are some of the main

recommendations of the Vickers Report:

i. One of the main recommendations made in the

report was that the banking structure in the UK

ought to be Ring fenced with the Investment

Banking activities, but without total separation.

2 Alastair Hudson N1 above page 8823 Alastair Hudson n1 (Page 882)4 Ring-fencing UK Banks More of a problem than a solution Edited byJames Bartyhttp://www.policyexchange.org.uk/images/publications/ringfencing%20uk%20banks.pdf Accessed on 26/12/2014 Page 6

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In essence both the Ring fenced division and the

Non Ring-fenced division would be part of the

same entity. The Ring-fenced group would be

engaged in accepting deposits and making payments

on behalf of its customers and the Non Ring-

fenced group would be engaged in other riskier

operations,

ii. The report also recommended that, the banks in

the UK should have a higher capital requirements,

iii. It was also recommended that, the banks in the UK

should also have a higher loss absorbing

capacity,

iv. The report recommended that, banks in UK should

have independent governance. The Ring-fenced

group should have its own independent board of

directors and Chairman from that of the

Investment banking operations or the Non ring-

fenced entity.

v. It was recommended that, the recommendations

should be implemented as soon as possible and

should be finalised by 2019.5

In essence, the suggestion made in the Vickers Report is

that, the retail banks operating in the UK would be ring-

fenced from the other activities and that the ring-fenced

banks would be prohibited from dealing in risky derivatives

and would be limited to deposit taking, making payments and5 Alan Bainbridge, David Shearer, James Atkinson, Kenneth Gray and SimonLovegrove, Legislative Comment, The Banking Reform Act 2013 (2014 COBPage 2)

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similar activities. The Government was of the opinion that

a ring-fenced bank would be prohibited from carrying out

international, wholesale investment banking services and

other risky activities hence it would be more prepared to

survive financial shocks that may arise in the future.6 The

object of Ring-fencing could be to divide the wholesale and

investment businesses of a bank from its retail activities

so that the former does not have a negative impact on the

financial condition of the latter.7 It is important to point

out the fact that, the steps adopted by the UK are

different to the ones adopted by the EU and the USA.

The concept of ring-fencing has assumed that, the retail

banking business in the United Kingdom is completely free

from risks, this can be proved otherwise with the example

of the rundown of Northern Rock which did not have an

investment and still it became a victim of the financial

crisis of 2008.8 One of the main reasons for the failure of

the retail banking business can be attributed to the poor

quality of due diligence carried out prior to the

sanctioning of loans to the customers. This could be

addressed by the better management of the banks as a whole.

Further, according to the new act, the ring-fenced fenced

entity and the non-ring-fenced entity are not completely

6 Alan Bainbridge, David Shearer, James Atkinson, Kenneth Gray and SimonLovegrove (n4 above page2)7 Alan Bainbridge, David Shearer, James Atkinson, Kenneth Gray and SimonLovegrove (n4 above page5)8 Mark Field, Vickers Ringfence is no Panacea, (2012-2013) 31 Int'l Fin.L. Rev. 62, (http://heinonline.org) Accessed on 22/12/2014

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separated the non-ring-fenced entity would continue to

carry on business with the same name and style of the ring-

fenced bank. The management of the ring-fenced and the non

ring-fenced entity would be different, however in the event

of the failure of the non-ring-fenced entity there is every

chance that the business of the retail bank might be

affected.9

Concept of Ring-fencing is not new

It has been argued that the concept of ring-fencing opted

in the United Kingdom similar to the ring-fencing system as

envisaged in the Glass-Steagall system that existed in the

USA pursuant to the great depression of 1929. The Glass-

Steagall system essentially separated the retail banking

and the investment banking from one another. The Glass-

Steagall system was only repealed in the year 1999. Hence

it may not suit the prevailing banking structure in the

United Kingdom. The law introduced then in the United

States was with an intention to dictate the structure and

separate the activities of different parts of the financial

services industry. In particular, there was a separation of

the activities of commercial banks from what would now be

termed investment banks. It also prohibited the investment

banks from taking deposits from the general customers which

is one of the important features proposed in the Vickers

report and the same that has been introduced into the act.

9 Mark Field, N8 above P.62, (http://heinonline.org) Accessed on22/12/2014

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The ring fencing concept despite being in force till the

year 1999 was not successful in averting some of the

financial downturns experienced in the United States. The

concept of ring-fencing has its limitations and flaws most

importantly the aspect of the cost involved in the ring

fencing of the banks and it has also not been tested within

the banking structure of the United Kingdom, hence nobody

can foresee whether it is the best or the last option to

avert another banking crisis.

However after receiving the recommendations made in the

Vickers Report, the Parliament held deliberations and

enacted the Financial Services (Banking Reform) Act, 2013

by inserting Part 9B into the Financial Services Market

Act, 2000. Surprisingly the term ring- fencing has not been

defined in the Financial Services (Banking Reform) Act,

2013. The parliament first decided to enact the primary

legislations and then follow it up with the secondary

legislations at a later stage. I have analysed certain

important provisions of the legislation as follows;

Section 142A “Ring-fenced body”

(1) In this Act “ring-fenced body” means a UK institution

which carries on one or more core activities (see section

142B) in relation to which it has Part 4A permission.

(2) But “ring-fenced body” does not include—

(a) A building society within the meaning of the Building

Societies Act 1986, or

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(b) A UK institution of a class exempted by order made by

the Treasury.

(3) An order under subsection (2) (b) may be made in

relation to a class of

UK institution only if the Treasury are of the opinion that

the exemption conferred by the order would not be likely to

have a significant adverse effect on the continuity of the

provision in the United Kingdom of core services.

(4) Subject to that, in deciding whether and, if so, how to

exercise their powers under sub section (2) (b), the

Treasury must have regard to the desirability of minimising

any adverse effect that the ring-fencing provisions might

be expected to have on competition in the market for

services provided in the course of carrying on core

activities, including any adverse effect on the ease with

which new entrants can enter the market.

(5) In subsection (4) “the ring-fencing provisions” means

ring-fencing rules and the duty imposed as a result of

section 142G.

(6) An order under subsection (2) (b) may provide for the

exemption to be subject to conditions.

(7) In this section “UK institution” means a body corporate

incorporated in the United Kingdom.10

A reading of this section highlights two important aspects.

Building Societies recognised under the Building Societies10Financial Services (Banking Reform) Act, 2013 Section 142Ahttp://www.legislation.gov.uk/ukpga/2013/33/pdfs/ukpga_20130033_en.pdfaccessed on 24/12/2014

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Act, 1986 have been excluded from the ambit of ring-

fencing. It is submitted that, currently there are many

building societies which are engaged in the banking

business. Further some of the building societies engaged in

the banking business were hard hit during the financial

crisis of 2008. When the intention of the new act is to

strengthen the existing banking structure of United Kingdom

it might not serve its necessary purpose if the building

societies which are engaged in the banking activities are

exempt from the provisions of the act. The act as it stands

also exempts the Insurance companies, Credit Unions and

Industrial and Provident fund societies despite these

institutions being engaged in holding deposits from their

members which may not be in the best interests of its

members.

“142B Core activities”

(1) References in this Act to a “core activity” are to be

read in accordance with this section.

(2) The regulated activity of accepting deposits (whether

carried on in the United Kingdom or elsewhere) is a core

activity unless it is carried on in circumstances specified

by the Treasury by order.

(3) An order under subsection (2) may be made only if the

Treasury are of the opinion that it is not necessary for

either of the following purposes that the regulated

activity of accepting deposits should be a core activity

when carried on in the specified circumstances.

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(4) Those purposes are—

(a) To secure an appropriate degree of protection for the

depositors concerned, or

(b) To protect the continuity of the provision in the

United Kingdom of services provided in the course of

carrying on the regulated activity of accepting deposits.

(5) The Treasury may by order provide for a regulated

activity other than that of accepting deposits to be a core

activity, either generally or when carried on in

circumstances specified in the order.

(6) An order under subsection (5) may be made only if the

Treasury are of the opinion—

(a) that an interruption of the provision of services

provided in the United Kingdom in the carrying on of the

regulated activity concerned could adversely affect the

stability of the UK financial system or of a significant

part of that system, and

(b) That the continuity of the provision of those services

can more effectively be protected by treating the activity

as a core activity.11

“142C Core services”

(1) References in this Act to “core services” are to be

read in accordance with this section.

(2) The following are core services—

11 Financial Services (Banking Reform) Act, 2013 Section 142Bhttp://www.legislation.gov.uk/ukpga/2013/33/pdfs/ukpga_20130033_en.pdfaccessed on 26/12/2014

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(a) Facilities for the accepting of deposits or other

payments into an account which is provided in the course of

carrying on the core activity of accepting deposits;

(b) Facilities for withdrawing money or making payments

from such an account;

(c) Overdraft facilities in connection with such an

account.

(3) The Treasury may by order provide that any other

specified services provided in the course of carrying on

the core activity of accepting deposits are also core

services.

(4) If an order under section 142B (5) provides for an

activity other than that of accepting deposits to be a core

activity, the Treasury must by order provide that specified

services provided in the course of carrying on that

activity are core services.

(5) The services specified by order under subsection (4)

must be services in relation to which the Treasury are of

the opinion mentioned in section 142B (6) (a).12

It is submitted that, another criticism that could be

levelled is that the definitions of core activities and

core services is that they only cover small range of

banking services would be covered by the scope of ring-

fencing. They are only limited to accepting deposits, to

make payments, and to provide overdrafts available. There12Financial Services (Banking Reform) Act, 2013 Section 142Chttp://www.legislation.gov.uk/ukpga/2013/33/pdfs/ukpga_20130033_en.pdfaccessed on 26/12/2014

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would be other banking services including the operation of

current accounts, ordinary lending, mortgages, insurance

and mainstream investment products (such as unit trusts)

which will continue outside that ring-fence and which will

therefore be unprotected by this regulatory scheme.13

The Financial Services and Markets Act 2000 (Ring-fenced

Bodies and Core Activities) Order 2014 was made in exercise

of the powers conferred by sections 142A (2)(b), 142B(2),

142F and 428(3) of the Financial Services and Markets Act

2000 as a secondary piece of legislation which comes into

force from 01/01/2015. In this order various important

aspects have been explained, most importantly this order

explains the core deposit level condition, and also

specifies circumstances which would not be considered as a

core deposit.

“Article 12 Core deposit level condition”

(1) The core deposit level condition is that at any

particular time (‘T’)—

(a) In the case of a UK deposit-taker which is not a member

of a group, its average core deposit total is equal to or

less than £25 billion;

(b) In the case of a UK deposit-taker which is a member of

a group, the sum of the average core deposit totals for

each member of the group that is a relevant group member is

equal to or less than £25 billion.

13 Alistar Hudson Banking Regulation and the Ring-fence, (COB 2013 Page9)

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(2)For the purpose of paragraph (1) (b) a group member is a

relevant group member if—

(a) It is a UK deposit-taker; and

(b) It does not carry out the regulated activity of

effecting or carrying out contracts of insurance as

principal in accordance with permission under Part 4A of

the 2000 Act.

(3)Subject to article 13, the average core deposit total

for a UK deposit-taker is determined as follows;

(a) Calculate the total core deposits held by the UK

deposit-taker at the end of each quarter in the core

deposit calculation period to produce quarterly totals; and

(b)Add those quarterly totals together and divide by the

number of quarters in the core deposit calculation period.

(4)The core deposit calculation period is

(a)In the case of a UK deposit-taker that has existed for

three financial years or more, the period of three

consecutive financial years of that UK deposit-taker which

ends immediately before the start of the financial year in

which T falls;

(b) In the case of any other UK deposit-taker, the period

for which that UK deposit-taker has existed at T.

(5) If a UK deposit-taker holds core deposits in a currency

other than sterling, the quarterly totals referred to in

paragraph (3) must be calculated by converting financial

amounts representing such deposits into sterling.

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(6)The conversion must be made by reference to an

appropriate spot rate of exchange as at the last day of the

quarter to which a quarterly total relates.

(7) In this article a reference to a quarter is a reference

to any complete quarter falling within a core deposit

calculation period for a UK deposit-taker.14

In the (Ring-fenced Bodies and Core Activities) Order 2014

the authorities prescribe that an UK banking entity which

does not belong to any group would be part of the ring

fencing mechanism only if its core deposits are more than

25billion pounds over a period of 3 years and in case of an

UK banking entity which is a member of a group, the sum

average of the deposits of each of the member of the group

should not be less than 25 billion pounds over a relevant

period of 3 years. A mere perusal of the aforementioned

provision highlights the fact that, a bank whose core

deposits are more than 25bn pounds over a period of 3 years

would come under the ambit of ring-fencing legislation.

This criteria might cause a disadvantage to the bigger

banks engaged in the banking over the smaller banks. The

smaller banks which do not come under the ambit of ring-

fencing would be permitted to engage in the selling of

structured products which is considered to be one of the

most important investments for the customers. The ring

14 The Financial Services and Markets Act 2000 (Ring-fenced Bodies andCore Activities) Order 2014, Article 12,http://www.legislation.gov.uk/uksi/2014/1960/pdfs/uksi_20141960_en.pdfaccessed on 24/12/2014

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fenced banks would be restrained in dealing in such

products which would put them at a considerable

disadvantage over the smaller banks.15 In other words the

smaller banks or the non Ring-fenced entities would be put

to an unfair advantage over the ring fenced entities as

they would not be subject to some of the conditions imposed

by the new enactment. This aspect could be reconsidered by

the law makers so that the there is equality between all

the banking institutions in the United Kingdom.

Costs of Ring-Fencing and its Potential Hazards

One of the major reservations the existing banks in the

United Kingdom have about the decision of Ring-fencing is

the cost involved to ring fence the banks which qualify to

be ring fenced in the United Kingdom. The big banks like

Santander, RBS, Lloyds banking group, Barclays and HSBC

would all have to be ring fenced, since these banks have a

large market share and have a large presence throughout the

United Kingdom it would be a very expensive affair to ring

fence these entities. Recently there was a news paper

article which reported that banks like TSB, Santander and

Virgin Money are joining Royal Bank of Scotland Barclays,

Lloyds and HSBC in submitting their formal ring-fencing

plans to the Bank of England despite the fact that banks

have time till 2019 to formally ring-fence their

15JamesBartyn4abovehttp://www.policyexchange.org.uk/images/publications/ringfencing%20uk%20banks.pdf Accessed on 26/12/2014

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operations.16 It is important to note that the Bank of

England is still working on certain points of the ring-

fencing regime even to this day as there are confusions

regarding the regulations opted by the European Union and

the effects they might have on the laws opted by United

Kingdom.17 It is pertinent to mention the fact that banking

institutions like Virgin money have submitted their ring

fencing proposals despite the fact that their operations

are limited within the United Kingdom and that they might

not qualify for the ring fencing criteria which is a

deposit of 25 billion pounds over a period of three years.

The Chairman of HSBC Mr. Douglas Flint had quoted that “the

cost of ring fencing for HSBC would cost between one

billion pounds to two billion pounds which was much more

than expected.”18 This clearly proves the fact that ring-

fencing would indeed be an expensive affair for all the

banks operating in the United Kingdom and could hurt their

operational profits.

Another important aspect to be considered here would be the

fact that, till date opening of a bank account in United

Kingdom was free, the banks do not charge the customer to16JamesTitcomb Banks respond to ring-fence plans The Telegraphhttps://uk.finance.yahoo.com/news/banks-respond-ring-fence-plans-201524291.html Article dated 03/01/2015 Accessed on 04/01/201517Sam Fleming, Banks under pressure on UK ring-fencing plans, TheFinancial Times, http://www.ft.com/cms/s/0/562464ee-4d77-11e4-bf60-00144feab7de.html#axzz3NtjKhsbH Article dated 06/10/2014, Accessed on05/01/2015 18 Harry Wilson, HSBC puts price of building banking ring-fence at £2bnThe Times, Banking and Finance,http://www.thetimes.co.uk/tto/business/industries/banking/article4243506.ece Article dated 22/10/2014 Accessed on 04/01/2015

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open an account. However experts feel that, the concept of

ring-fencing the banks could bring an end to this consumer

oriented service. An article in the daily Telegraph stated

that “if the ring-fenced banks were to be restricted in

their range of products and services as currently envisaged

in the new act, and if individuals with the capability to

deposit high amounts of money take their business abroad,

revenue bases of the banks in the United Kingdom would be

eroded,” which would result in higher costs and lower

revenues would be passed on to individuals and SMEs, who

can bank only with the ring-fenced bank as they are not

allowed to bank outside of the ring fence and this could

result in a fundamental change to the way banks structure

their charges. “Enforcing a rigid ring fence around the

banking activities in the United Kingdom may result in

unintended consequences including further closures of high

street branches and even the end of 'free’ banking.”19 The

heavier the burden on banks, through taxes, capital or

other regulation, the cost of funding the real economy will

become higher and these costs would result, in a tighter

supply of credit, lower rates for depositors and may

possibly the end of “free consumer banking” in UK.20

19Kamal Ahmed, Ring-fence costs could end free banking in UK, TheTelegraph,http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/10518242/Ring-fence-costs-could-end-free-banking-in-UK.html Article dated14/12/2013, Accessed on 05/01/2015

20 http://www.policyexchange.org.uk/images/publications/ringfencing%20uk%20banks.pdf N14 above Page 10

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Problem of Competition as a result of the Ring-Fencing

Another area of concern would be that, the concept of ring-

fencing would apply only to an institution which has been

incorporated in the United Kingdom, which means that the

banks that have been incorporated in the European Union or

elsewhere would be exempted from the ring-fencing regime

which may give them an unfair advantage over the banks

incorporated in the UK. E.g. A bank which is headquartered

in the Iceland or any other European country can open its

branch in the United Kingdom without having to go through

the complicated and expensive system of ring-fencing, this

aspect would provide the foreign banks an unfair advantage

over the banks headquartered in the United Kingdom and this

might potentially hurt the profits of the home grown banks

of United Kingdom. The banks which are not incorporated in

the United Kingdom would be capable of serving the

customers as a one stop shop for all their financial needs

and may also attract the high net worth individuals and

large corporations to do business with them. The act as it

stands now permits a high net worth individual and a large

corporation who fulfil certain conditions prescribed in the

Financial Services and Markets Act 2000 (Ring-fenced Bodies

and Core Activities) Order 2014 to bank with a non ring-

fenced entity. This could hurt the business prospects and

also the profits of the smaller banks as a result of losing

business to the bigger banks. Further the banks

incorporated in the UK would not be able to serve as a one

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stop shop for all the financial needs of a customer and

hence the consumers would be forced to approach different

entities of the same group for the services which they want

resulting in an extra financial burden on the consumers.

There is another aspect which is also very important with

reference to competition between banks is that, the big

banks like Santander, Lloyds Banking Group, Royal Bank of

Scotland and Barclays which are also known as the big four

would have an advantage over their smaller counterparts as

they would be able to provide their corporate clients

access to both their ring-fenced and non-ring-fenced

products and services provided they meet the criteria laid

down under The Financial Services and Markets Act 2000

(Ring-fenced Bodies and Core Activities) Order 2014.21 Thus,

the larger banks will have an advantage over their smaller

counterparts which may result in the reduced competition

and the reduced number of choices for the average customer.

E.g. “Where the corporate client needs access to banking

products and services outside of EEA or has sophisticated

hedging needs the ring-fenced banks without a non-ring-

fenced operation will most likely lose the corporate

clients as the client needs services provided by non-ring-

fenced entities and these services cannot be provided by

ring-fenced banks as they are prohibited by the

21 James Barty N4 above http://www.policyexchange.org.uk/images/publications/ringfencing%20uk%20banks.pdf Accessed on 05/01/2015 Page 59

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legislation”.22 The banks which don’t operate outside the

United Kingdom may end up as the biggest losers of the

ring-fencing regime. With that growth, their needs will

become more sophisticated and a standalone ring-fenced bank

will be unable to meet those needs. These factors may

result in the stagnation of the Banking sector as there

might be no new players to challenge the big banks already

operating in the United Kingdom.

The concept of ring-fencing envisaged for the United

Kingdom is completely different to the model adopted by the

European Union. The European Union received the Liikkanen

report which recommended changes to the existing banking

system of the European Union. The main recommendations in

the report were that;

• “The structural reform proposal will strengthen the

resilience of the EU banking sector while ensuring that

banks continue to finance economic activity and growth.

• It will apply only to the largest and most complex EU

banks with significant trading activities.

• In brief, the proposal would:

1. Ban proprietary trading in financial instruments and

commodities;

22James Barty N12 above http://www.policyexchange.org.uk/images/publications/ringfencing%20uk%20banks.pdf Accessed on 05/01/2015 Page 59

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2. Grant supervisors the power and in certain instances the

rebuttable obligation to require the transfer of other

high-risk trading activities (such as market making) to

separate legal trading entities within the group

(“subsidiarisation”);

3. Provide rules on the economic, legal, governance, and

operational links between the separated trading entity and

the rest of the banking group; and

4. Increase transparency on shadow banking activities,

especially repo and securities lending transactions. These

transactions have been a source of contagion and leverage

in the financial crisis”.23

The key aspect to be noted here is that, despite there

being a recommendation that the trading activities must be

separated from the more riskier business of the banks, the

difference is that it would only apply to the largest and

complex banks operating in within the European Union, this

may be more cost effective compared to the ring-fencing

idea proposed in the United Kingdom wherein any bank whose

total deposits are over 25billion pounds over a period of 3

years would be ring-fenced, this may be a very expensive

affair for the treasury and also the banks. However the

regulations in the European Union are slated to come into

force only from the year 2017. These proposals are

different from Vickers' to and heap further uncertainty23 http://ec.europa.eu/finance/bank/docs/structural-reform/140129_citizens-summary_en.pdf Accessed on 06/01/2015

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upon financial services providers in the City of London.24

The differences of the regulations might affect the

secondary legislations that are slated to be passed in the

United Kingdom at a later stage.

CONCLUSION

Despite the best efforts of the authorities to revamp the

banking structure in the United Kingdom and to make them

more resilient, the financial health of some banks in the

United Kingdom continues to be weak. This was recently

brought to the forefront when the Co-Operative Bank failed

the stress test conducted on 16/12/2014 by the Bank of

England and further big banks like the Lloyds Banking group

and the Royal Bank of Scotland managed to scrape through in

the stress test.25 This implies that the banks should work

towards becoming more resilient and to improve their

finances. As mentioned above the ring-fencing rules as

proposed are very complicated and expensive for on the

finances of the bank as well as the treasury and could be

very difficult for the authorities to meet the proposed

deadline of 2018-2019. The banks have already started

submitting their preliminary models of ring-fencing to the

Bank of England in the month of January 2015. Recently,

Lloyds banking group sought for a waiver of the rule which

prescribes two different boards for the ring-fenced entity24 Mark Field, N8 above page 62 (http://heinonline.org) Accessed on22/12/201425Joe Miller, Co-op Bank fails Bank of England stress tests,http://www.bbc.co.uk/news/business-30491161 Article published on16/12/2014 , Accessed on 06/01/2015

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and the non ring-fenced entity and the reason for seeking

the exemption is that, over 90% of its business would come

under the ambit of ring-fencing and hence two different

boards may not be necessary.26 Omar Ali, UK head of banking

and capital markets at EY, said: “2019 may seem a long way

away, but unravelling decades of infrastructure, systems,

processes and governance is complex, time-consuming and

expensive. Some are likely to need waivers to meet the

timetable.”27 This proves the fact that the, concept of

ring-fencing is not only expensive but also very time

consuming for the authorities to enforce. Only time will

tell if the proposed ring-fencing of the retail banks from

their investment entities in the United Kingdom would be

successful and was it the best step forward to avert

another financial crisis that brought the banking structure

in the United Kingdom to its knees.

26 Martin Arnold and Emma Dunkley, Lloyds Banking Group seeks key ring-fencing rule exemption, TheFinancialTimes,Londonhttp://www.ft.com/cms/s/0/43c18cdc-9502-11e4-8fc1-00144feabdc0.html#axzz3O3CG2IUu Article dated 05/01/2015, Accessed on06/01/201527 Martin Arnold and Emma Dunkley, N26 above,http://www.ft.com/cms/s/0/43c18cdc-9502-11e4-8fc1-00144feabdc0.html#axzz3O3CG2IUu Article dated 05/01/2015, Accessed on06/01/2015

25

Bibliography

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Financial Services (Banking Reform) Act, 2013

The Financial Services and Markets Act 2000 (Ring-fenced Bodies

and Core Activities) Order 2014

Books

Ellinger.E.P, Lomnicka. E and Hare. C.V.M, Ellinger’s Modern

Banking Law, 5th Edition (2011)

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Hudson. A, The Law of Finance, The Law of Finance, Sweet and

Maxwell (2nd Edition 2013)

Journal Articles

Mark Field, Vickers Ring-fence is no Panacea, (2012-2013) 31

Int'l Fin. L. Rev. 62,

Hudson. A, Banking Regulation and the Ring-fence, (COB 2013 Page

9)

Bainbridge.A, The Financial Services (Banking Reform) Act: timingis everything, (2014) 4 JIBFL 256

Bainbridge A, Shearer D, Atkinson J, Gray. K and Lovegrove S,

Legislative Comment, The Banking Reform Act 2013, 2014 COB 1

Websites

Financial Services (Banking Reform) Act, 2013

http://www.legislation.gov.uk/ukpga/2013/33/pdfs/ukpga_20130033_e

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The Financial Services and Markets Act 2000 (Ring-fenced Bodies

and Core Activities) Order 2014,

http://www.legislation.gov.uk/uksi/2014/1960/pdfs/uksi_20141960_e

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Ring-fencing UK Banks More of a problem than a solution Edited by

James Barty

http://www.policyexchange.org.uk/images/publications/ringfencing

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