Back in 2011, Sir John Vickers set out the initial proposal for bank ring-fencing. Its aim is to separate the services that small and medium-sized banks provide from their more high-risk investment trading operations. This therefore protects the high-street customer if the investment banking and trading operations of those banks sustain big losses and place the viability of the bank in question.
As simple as this may sound, only now, many years later, are the banks and regulators defining what this will look like. They are starting to implement the “separation” of the ring-fenced entity in each institution. Innumerable hours of analysis into which client resides in which entity is finally prompting banks to classify their customers into these two groups.
While your classification may remain unchanged, this potential change in counterparty risk highlights some key aspects that may affect your business. There are several questions you should be discussing with your bank now, before the deadline. You will then have time to adjust your banking strategy accordingly.
Which entity will my Business/Charity be in – the ring-fenced on non ring-fenced part of the bank?
This is essential to understand if there are further implications on your business from a counterparty risk, operational, tax, or legal perspective.
Has the credit rating of the entity changed because of ring-fencing?
Banks need to apply capital to each entity separately. How this is done and how much is applied to each entity may mean that your bank has a change in credit rating. This may, in turn, affect any internal parameters you may have regarding your banking counter parties.
Will the details of my existing account with my bank change?
It is possible, even though you remain with the same bank by name, the details of your existing sort code or even account number may need to change. For a Charity or Business, who has provided these details to hundreds or even thousands of clients or donors to make payments, this could mean significant disruption and preparation time.
The deadline is 1st January 2019 but the implementation is complex and slow. I urge you to contact your provider to determine what their steps are. This will ensure the process is as smooth as possible and has as little impact on your business as possible.
We believe this process should be a catalyst for re-examining clients banking relationships more generally. The industry continues to experience unprecedented change and many historical assumptions may now be obsolete.
If you would like more information on any of the points raised in this article, then please get in touch with me via info@insignisam.com.