To prevent a repeat of the 2008 financial crisis, UK regulators have set out to drastically reform the banking system – by separating the retail and riskier investment arms of UK banks into separate legal entities. Known as ring-fencing, the objective of these new rules is to achieve greater resilience and financial stability for the banking system.
Ring-fencing applies to any UK bank with over £25bn of retail deposits, including all major high street banks, and they must be ring-fenced by 1st January 2019. The changes will impact corporates as well as personal customers.
Most recently, Barclays announced that it is beginning the process of separating its systems ahead of the rules kicking in. As such it has warned its customers to expect regular weekend blackouts for online, phone and mobile banking services until next year. The impact on consumers is clear, but which corporates are likely to be affected? What are the potential implications and what questions should treasurers ask their bank?
Corporates with sophisticated needs – typically those with access to investment banking services – will be most impacted, as they are more likely to find themselves dealing both sides of ring-fenced banks. With such a major restructure across the UK’s largest banks, corporates must prepare themselves for a temporary increase in operational risk and potential for fraud.
One of the most noticeable changes will be the provision of new sort codes. In fact, the Bank of England has estimated that over one million customers could see their sort codes change.
Each bank must decide whether the sort code of a branch currently serving corporates and personal customers will follow the customers being moved to a new legal entity, or stay with the customers which remain. These new sort codes will also mean affected customers’ IBAN will change.
Impacted corporates will need to ensure they have full visibility of their bank accounts and in some cases under new sort codes. It is also important for treasurers to be aware that the ring-fencing rules are not completely rigid, since they do offer some degree of choice to each bank. Ironically, this flexibility probably increases complexity for corporate treasurers who are generally multi-banked, because each bank will adopt a slightly different structure.
For instance, the new rules do not specify whether certain important banking services – such as trade finance, simple derivatives, and deposit-taking for large corporates – should be inside or outside the ring-fence. Treasurers therefore should ask their UK banks detailed questions about their ring-fencing plans. What activities will be inside the ring-fenced bank and what activities will fall outside? Is there any impact on legal documentation? A treasurer is likely to get a different response from each bank.
Some banks will move their full corporate proposition into non-ring-fenced banks, while creating ring-fenced banks that are focused on providing retail services to individuals and small businesses. On the other hand, other groups are creating much broader ring-fenced banks which include a larger set of permitted activities. In this case, only activities prohibited inside the ring fence will need to be moved out.
During this time of significant change, it is important that treasurers have up-to-date validation and verification capabilities for accurate payment routing. Despite assurances from the banks that payments will be re-routed to new sort codes and that Direct Debits will be switched automatically, anyone making or receiving payments will need to be on alert for payment routing errors. Real-time visibility of multiple bank accounts will be crucial to avoid unexpected overdrafts and reduce the risk of payments going astray.
Treasurers should also be vigilant.
We are likely to see the rise in fraudsters taking advantage of the situation – attempting to con corporate and personal customers, into sending funds to a fraudulent account, or compromise banking credentials.
This becomes a timely reminder of the importance of having clear visibility of up-to-date balances and transactions on all bank accounts. Corporates and banks need to be able to monitor their employees’ activity relating to bank accounts and to check all their transactions for any abnormal or suspicious activity. For example, transactions for an abnormally high value or new activity on an account that has been dormant.
It is also important to monitor employees viewing accounts they would not ordinarily visit for their normal duties. Such abnormal behaviour might be an early warning of an intended fraud. Cyber fraud and risk management tools will be of increased benefit during this period of change when the risk of fraud is greater than ever.
Finally, as with any significant infrastructure overhaul, there is the potential for disruption. Treasurers need to be prepared by ensuring contingency plans are in place in the event of a bank’s systems malfunctioning during the transition.
The challenges faced by treasurers in response to ring-fencing are exacerbated by the backdrop of other major changes in the banking and payments industry, such as Brexit, MIFID2, Open Banking, PSD2 and New Payment Architecture. Keeping abreast of industry developments and the implications these initiatives will have on corporates, is essential.
After ring-fencing has been completed, UK banks will be safer, but is there a risk that they become less competitive, given the extra costs of their new ring-fenced structures? It is too soon to tell, but treasurers will need to watch this carefully.
About the author
Marcus Hughes serves as director at Bottomline Technologies. He has more than 20 years’ experience in the software and banking industries, helping corporate treasury and financial services institutions devise and implement strategic initiatives for cash management, trade finance and supply chain automation. He previously held senior-level positions with a number of European banks, including head of global trade services at Banco Santander.