LONDON (Reuters) - Barclays BARC.L is planning to set up a smaller separate UK bank than rivals as British lenders finalise how to restructure to meet new rules designed to give greater protection to savers and taxpayers.
Britain’s big lenders must set up so-called ‘ring-fenced banks’ by 2019. The new businesses must include UK retail banking and small business customers and most simple activities. Big global corporate customers and most investment banking products have to sit outside in a separate entity.
Banks are left to choose whether to place many other customers and activities inside or outside the ring-fenced business -- areas such as mid-sized businesses, wealth management activities or simple derivatives products.
Unless it makes a U-turn, Barclays will adopt a different structure to its main rivals.
Barclays looks set to choose a “narrow” ring-fenced bank, which means it will put as few customers and activities inside the new unit as possible, industry sources said.
The sources said Barclays had long intended to follow that model, and one said the decision was rubber-stamped at a meeting of top management last week. Barclays declined to comment.
The decision is crucial for how banks will look in the future and how they deal with customers. Setting up the ring-fenced operations is also expected to cost the industry at least 5 billion pounds ($7.8 billion) and be long and complex.
David Parker, head of UK banking at consultancy Accenture, said the restructuring is difficult and costly at a time banks are “trying to reinvent” themselves for the digital era and to move on from past conduct issues.
“There’s no doubt that when you overlay the effort required for ringfencing it’s problematic and it’s forcing institutions to make very, very hard choices about whether to sacrifice launching new products or new services,” Parker said.
Under the new rules at least six British banks must set up the firewalls, which lawmakers expect to shield savers from problems in riskier areas of banking and try to avoid a repeat of the 2007-09 financial crisis when taxpayers had to bail out Royal Bank of Scotland RBS.L and Lloyds LLOY.L.
HSBC HSBA.L, which had previously considered a narrow ring-fenced bank, has now opted to set up a broad structure. Lloyds and RBS have always planned to include the majority of their customers, staff and businesses in the ring-fenced bank, reflecting their core focus on domestic banking.
Final rules will not be laid out until early next year and how they are set for capital, liquidity, dividends and derivatives could still force banks to rethink plans.
Banks have submitted preliminary plans, but Prudential Regulation Authority boss Andrew Bailey told Reuters in May big changes were still be made, partly because banks are already shrinking and reshaping investment banking.
Barclays appears to have the biggest challenge, industry sources said, and it has appointed former Bank of America BAC.N executive Jonathan Moulds to oversee the process.
Banks are likely to make decisions based on where they see most collaboration and cross-selling opportunities.
Making the ring-fenced bank as big as possible enables them to offer personal current accounts, business banking and wealth management to an entrepreneur, for example. A smaller ring-fenced bank could mean it’s easier to sell complex investment banking products to corporates.
Customers most affected will be corporate clients which fall between small and global companies. For example, a large but mainly domestic retailer like supermarket William Morrison MRW.L could end up inside or outside the ring-fence.
Banks may choose to use two different brands. HSBC has said it will rebrand its ring-fenced bank, so customers are aware that they are dealing with two different operations.
Other big challenges include setting up independent boards, new contracts for customers and staff and considerable technology upheaval.
Banks are aiming to have their ring-fencing structures up and running from the start of 2018, a year ahead of deadline.
HSBC has said its ring-fenced bank will be based in Birmingham, 125 miles (200 km) from its London group headquarters, in a new building for 2,500 staff. It will include private banking and account for two-thirds of its UK revenue and have about 26,000 staff.
A further 14,000 staff will be in functions such as human resources, technology and communications shared by both the ring-fenced bank and the non-ring-fenced unit.
Lloyds says 97 percent of its assets will sit inside its ring-fenced bank and RBS, which is in the process of drastically shrinking its international operations, has said 80 percent will be within the unit, including its Coutts private bank.
HSBC said this week it will cost about 1.5 billion pounds to set up its new unit. Lloyds said the cost of setting up the ring-fenced entity would be in the “hundreds of millions” of pounds with ongoing annual costs in the “tens of millions”.
($1 = 0.6406 pounds)
Editing by Keith Weir
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