Regulators at the Bank of England are quietly getting ready to authorise the creation of the three largest new banks to come into existence in the UK.

According to the BoE’s Prudential Regulation Authority, the new legal entities of HSBC, Barclays and Lloyds Banking Group will mark the biggest creation of banks measured by assets, as they crystallise their “ringfencing” plans and meet the regulator’s 2019 deadline to split their “core” retail services, such as deposit-taking, from their riskier investment banking units.

The idea is to prevent taxpayer bailouts of “too big to fail” banks that risk customer deposits when bets by their investment-banking units go wrong. A ringfenced bank must be a separate legal entity with its own board, and there will be limits on how much capital retail and investment banking entities can share.

“Ringfencing is a vital piece of the post-crisis reform architecture,” said James Proudman, executive director of banks and building societies at the PRA. “Ten years after the start of the financial crisis we’re entering the final lap ahead of 2019 finish line.”

Ringfencing rules, which were initially recommended by the Independent Commission on Banking chaired by former BoE chief economist John Vickers, apply to all banks with more than £25bn in deposits. Barclays, HSBC, Lloyds, Royal Bank of Scotland and Santander are all affected by the changes, as are a handful of smaller companies.

Until now, planning for the restructuring has taken place behind closed doors at the PRA. But customers are beginning to see changes as banks start the laborious task of switching over sort codes and account numbers. The changes will affect roughly 1m of the bank’s customers, according to PRA estimates.

Ringfence graphic

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Court hearings will also begin in the autumn, with a High Court judge ruling on the suitability of each bank’s plans to transfer large parts of its business to a new legal entity in order to comply with ringfencing legislation. Stakeholders, including individual customers, could participate in the legal proceedings.

The changes are intended to be gradual, with the banks’ ringfenced entities expected to be up-and-running from the middle of 2018, well before the January 2019 deadline. The staggered approach is by design to give the PRA and the banks the chance to test out their systems one at a time to minimise chances of a mass breakdown at the point of transfer.

But the ringfencing deadline is not the only looming change that will require banks to restructure. Lenders also have to prepare for when Britain leaves the EU in March 2019 — and it remains unclear whether the UK government will secure a transitional arrangement that would allow banks to delay any Brexit-related restructuring for a number of years.

Banks complain that the dual deadlines are putting them under increased pressure and pushing up their costs.

One chief executive said Brexit-related uncertainty is increasing costs because it is prompting lenders to put their plans on hold — which in turn creates a tighter timeframe for banks to comply with ringfencing rules.

It is also uncertain whether the UK will retain the ability to “passport” financial services across Europe after the Brexit. Losing this right would have a wide-reaching impact on London-based banks that are currently using branches to passport their services across the EU.

Santander is already planning to use the London-based branch of its Spanish parent bank, Banco Santander, to house its UK corporate and investment banking activity outside of the ringfence.

Bankers briefed on the situation said the PRA is currently reviewing Santander’s plan and what would happen to the UK branch if passporting rights are revoked. The PRA declined to comment.

While the PRA admits that the combination of Brexit and ringfencing has led to a “resource issue” for the banks, it insists there will be no delay in implementing the 2019 deadline, which has already been written into legislation.

“In an ideal world you probably wouldn’t chose to implement Brexit at the same time as ringfencing, but from our perspective it is perfectly manageable. The banks have significant change-management capabilities and their implementation of ringfencing is well under way,” Mr Proudman told the Financial Times this week.

But banks insist that other pieces of regulation are being made more complicated by Brexit, adding extra pressure to their ringfencing plans.

For example, last year the European Commission proposed that banks headquartered outside of the EU could be required to set up an independent holding company for their subsidiaries in the bloc. The proposal comes after a similar move by the US, and is shaping up to be one of the last major issues the UK is confronting as a member of the EU.

Ross McEwan, chief executive of RBS, said the bank had put its Irish business “inside [its] ringfence”, but added: “There is a possibility, depending on how that regulation comes out, that we may have to take it out.”

Mr Proudman said, however, that even if the EU’s proposal were implemented, it should not affect ringfencing.

“It’s not a system-wide issue of great significance,” he said. “Most of the banks’ EEA activities tend to be outside the ringfenced banks’ activities in any case.”

Other UK banks, such as Lloyds, will see less of an impact from Brexit on their ringfencing plans because the bulk of their business is in the UK. Just 7 per cent of Lloyds’ risk-weighted assets will reside out of its ringfenced unit.

However, George Culmer, the bank’s chief financial officer, conceded that ringfencing “is going to cost more” than originally expected.

“That’s due to the complexities of the project,” he said. “We originally said around £300m. It will be around £500m to build it. And that’s just additional complexities in building, extracting, constructing the infrastructure, complying with the times that we have to undertake legal costs, etc.”

The PRA, however, is unlikely to give in to the banks’ demands.

“There’s an extra element of complication,” Mr Proudman admitted. “But nothing that I have seen would suggest that it is infeasible or insurmountable.”

Additional reporting by Martin Arnold in London

Weekend shutdown at Barclays

This weekend will see Barclays’ customers unable to access online and mobile banking for 16 hours. The planned shutdown is just one of several scheduled until January, as the lender changes hundreds of thousands of its customers’ sort codes.

It is one of the most visible consequences of ringfencing to date, which until now has focused on drawing up the blueprints for separating big banks’ retail operations from their riskier investment banking units.

But with that process almost complete, the focus for lenders is now ensuring that customers do not lose out as banks begin to implement their plans before the 2019 deadline.

About 1m people are expected to see changes to their sort codes or account numbers as a result of ringfencing.

The FCA has told banks to communicate fully and early with customers. But the regulator is also worried about fraud. Scammers could take advantage of this unusual wave of communication from banks by sending fake messages that try to persuade people to give over confidential information, the watchdog has warned.

Barclays has done five “dry-run” practice exercises to ensure it has minimised the risk for fraud and error, according to one member of the bank’s board.

But the Financial Conduct Authority is worried that there is potential for disruption and confusion. Some, but not all, customers will see changes, depending on their bank’s particular plans.

Most banks will assist with changing over direct debits and standing orders, as they would whenever a customer switches providers. But customers are likely to still have to ensure their account details are updated with online retailers and apps after the changes go into effect.

Caroline Binham and Martin Arnold

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