Out-Law / Your Daily Need-To-Know

This is one of a  series of guides  on issues connected to ring-fencing and banking reform faced by banks. Other guides cover issues such as asset transfers, employment, issues for directors, real estate, pensions, litigation, third party contracts and tax considerations.

This guide was last updated in December 2013 

The Government's proposed ring-fencing measures do not envisage full structural separation. Nevertheless, they are wide-ranging in scope and intrusive. Given the regulatory requirements for operational independence, this may raise the question of whether the two parts of the bank would still be considered as a single undertaking from a competition law perspective. If not, agreements between the ring-fenced bank and other parts of the group would fall within the scope of competition law for the first time.

The case law of the European courts continues to confirm the presumption that companies in the same corporate group should be treated as a single undertaking, but that presumption can be rebutted.

Would the degree of independence from shareholder control on key aspects of the ring-fenced bank's business – as well as the directors' statutory responsibilities, which must in certain cases take priority over shareholders' interests – compromise that unity? This seems unlikely. However, this position should be considered again in light of the nature and extent of separation ultimately required by the PRA in its detailed rules.

In a similar vein, even if joint ventures have to be restructured as a result of the introduction of the ring-fence, we do not believe that merger control rules should apply as there is in essence no substantive change of control.

From a practical perspective, given the ability for the regulator to 'electrify' the ring-fence, it may be appropriate when revising agreements and structures within the bank to put in place provisions that anticipate this possibility and cater explicitly for the necessary amendments or any merger control approvals that may be required.

More broadly, the scope of any proposed exemption for smaller banks has the potential to distort competition in the sector. The desire not to create additional barriers to entry to the sector has to be balanced against the undesirability of creating an uneven playing field.

Finally, where the bank concerned has received state aid the implementation of ring-fencing may require the aid and the bank's responsibilities in relation to it to be disentangled.

The customer impact

Competition and consumer protection issues will continue to have a high profile as the FCA adapts to its new responsibilities in relation to competition, particularly if it is given concurrent jurisdiction to apply competition law, as expected. Given the potential for overlap between markets and customers as between the two sides of the ring-fence and the complicating factor of the interface between the FCA's competition and regulatory functions, this has the potential to create additional confusion for customers and for the banks in the management of investigations. meet the requirements of the listed building consent regime.

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