Government to accept ICB's proposals in full

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John Liver, who heads up EY's Global Regulatory Reform team, comments on the government’s decision to accept the ICB’s recommendations in full:

Timescales and RRP 
The introduction of ringfencing has to be seen in the context of wider regulatory reform around Recovery and Resolution Planning as these two policy initiatives have significant overlap in the effect they will have on bank’s operational models.  During 2012, which is the FSA deadline for RRP, banks will need to make clear decisions about the direction of travel for their ringfenced operations in order to respond to the proposed legislation while implementing RRP to meet FSA timescales. 

International competition of UK banks
The government’s implementation of Vickers in full is the boldest regulatory step taken in Europe in this arena, but, the EU has also announced the establishment of a committee to look into banking structures.

Capital requirements and implications for the business model and decisions about headquartering
The government’s decision to consult further on the impact of the ICB’s proposals for significantly increased primary loss absorbing capital is welcome. Most other countries do not have such proposals and significant differences will be an important factor in decisions about where banks are headquartered and the extent to which it is attractive for UK headquartered groups to own a UK retail bank. 

Business models
Within the ringfence one of the largest issues the banks will be grappling with is the challenge of changing their underlying business models. The ring fenced entity will need independence across operations, funding and governance and considerable work is needed to understand exactly which processes and products should be within the ringfence, how the ringfence and the other parts of the group interact and on what terms, and the profitability of different products and services on a standalone basis.  We foresee that core elements of the existing retail business model such as free in credit banking could be challenged.

Tax implications
Given the increased focus on the amount of regulatory capital a bank is required to hold and the restriction on the admissibility of deferred tax assets for capital, a key focus for banks now will be on ensuring that new forms of regulatory capital instrument (including "contingent capital") are as tax efficient as possible. Early engagement with HMRC on these tax treatments will be important."

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