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Banks win fresh concession on ringfencing rules

London's financial district, known as the Square Mile.
Getty Images
London's financial district, known as the Square Mile.

The City on Thursday won the second clear signal in 24 hours of a political shift in its favour when financial regulators granted a key concession on the ringfencing rule for the UK's largest banks.

In rules set out by the Bank of England, "ringfenced" banks will be allowed to transfer capital from their retail arms to other parts of their businesses in the form of dividends.

The concession is a boon to the UK's largest lenders, which have complained that ringfencing, due to be in place by 2019, puts them at a competitive disadvantage to their overseas rivals. The problem is particularly acute for those with large investment banking divisions.

The BoE's Prudential Regulation Authority is pushing ahead with reforms that will force the largest lenders to separate their retail and investment divisions. This was envisaged as a way of safeguarding UK retail deposits in the face of another financial crisis.

But in its first substantial clarification, the BoE said a ringfenced bank could pass on dividends to its parent group. The BoE's estimate of how much more capital banks would need to comply with the new rules was £3.3bn in aggregate; far less than expected.

A second BoE policy paper on how to wind down a bank — which applies to all UK banks, not just the largest — was also not as prescriptive as some had feared.

The concessions came after the Treasury said on Wednesday night that it was scrapping the most contentious part of a tough new accountability regime, designed to hold the most senior executives to account.

In a last-minute U-turn, the Treasury said it would excise from a bill the principle of the "reversal of the burden of proof", which would have, in effect, seen senior managers treated as guilty until they could prove themselves innocent.

Ringfencing and the accountability regime were key elements of post-crisis reforms, designed respectively to reduce the likelihood of taxpayer bailouts and clean up the City of London after a series of misconduct scandals.

"We may have gone a bit too far with reverse burden of proof," said Mark Garnier, a Conservative MP on the Treasury select committee and a member of the banking commission that had recommended the principle.

"The government has got a difficult line to take on this — part of why London is such a significant global financial sector is that we take a lead on financial regulation [ … you have got] to be able to judge what is taking a sensible lead and what is over-enthusiastic. With reversal of burden of proof, [we] got a bit over-enthusiastic."

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George Osborne, the chancellor, Mark Carney, the governor of the Bank of England, and Andrew Bailey, the head of the PRA, will testify before the Treasury committee next week to answer whether the climbdown followed "special pleading from the banks", the committee's chairman, Andrew Tyrie, said.

The U-turn is the latest in a series of emollient moves to banks since the Tories' victory in May's general election and since HSBC and Standard Chartered threatened to move their headquarters overseas in response to proposals to stiffen regulation.

Mr Osborne then moved to recalibrate the bank levy, and removed the combative head of the City watchdog, the Financial Conduct Authority.