What impact will ringfencing the banks have on financial services jobs? Nick Kirby assesses the recent ICB report
On 12th September, the Independent Commission on Banking (ICB) – under the auspices of its Chairman, Sir John Vickers – published recommendations that will determine how the UK banking industry will look in the future.
Born out of the financial crisis, the Commission was effectively charged with reforming the banking industry in order to prevent, or at least minimise the effects of, a ‘crash’ such as the one we saw in 2008. The following recommendations were at the heart of the report:
- Ringfencing – UK banks should ‘ringfence’ (but not totally separate) their retail operations from riskier arms, such as investment and brokerage, in order to make it less costly for taxpayers should there be another crisis.
- Capital requirements – Retail banks will have to hold capital equivalent to 10% of their risk-weighted assets (RWAs). For large ringfenced banks – such as the big four – this ‘loss absorption’ figure has been set at between 17-20%.
Additional recommendations were made with regard to promoting competition between banks so that the customer gets a better deal – the main points being the introduction of a new, large high-street bank and easier account switching between banks.
Banks have been given until January 2019 to comply with the new rules, which coincides with the deadline for implementation of the international capital rule changes as part of Basel III. While the 2019 deadline is deemed enough time for banks to rebuild their finances and make the necessary changes, it is recommended that implementation should be ‘as soon as possible’.
Probably one of the most eagerly awaited reports on banking in the modern era, it was met, unsurprisingly, by differing opinion from government, banks, lawyers, the media and the public. Most of the reaction centred on whether the ICB had pitched the proposals right, how the general public would be affected, and whether there would be sufficient transparency.
With the focus on the headlines, however, one area that seemed to slip slightly under the radar was that of employment and recruitment within the financial sector. While this may not have been at the forefront of many people’s mind, there is no doubting the fact that any structural changes to the banking industry will have far-reaching effects in the coming years.
Ray Nulty, Managing Director of Financial Services at Navigant Consulting, believes that the implications for the banking industry are massive. “Never before have we seen this level of fundamental upheaval in the banking sector around the world,” he says. “And it will have a direct impact on how banks are structured.”
The ringfencing of retail banking from other divisions, and the requirements imposed because of this, means that not only will banks with retail and non-retail operations have to have separate boards of directors, they will also have to keep a whole raft of functions separate.
“Operations within the ringfence are going to have to stay separate from those outside,” explains Nulty. “So that means separate treasury, IT and HR functions for instance. What’s more, the ringfenced bank may have to offer services to the non-ringfenced division as they would a third-party, in payments and deposits for instance, so you are going to need resources to manage these services. If a bank is currently highly integrated – separating out these functions will have a huge impact.”
Of course, while administratively this sounds something of a nightmare, it does create opportunities. Restructuring may create a whole new way of working, a new ethos, and those with the talent may be the ones to help deliver on the Report’s recommendations. Indeed, new departments and roles may be created in order to deal with the new structures.
James Bennett, Managing Director for EMEA and APAC at eFinancialCareers.com, believes there are some specific areas where candidates will be most needed. “The process of separation will unquestionably involve consultants and project managers, who are in short supply already,” he explains. “And as the cost of capital increases for investment banks, you can expect more emphasis on liquidity management and regulatory capital expertise.
“One analyst said that ringfencing retail banking will create a ‘bureaucratic nightmare’, therefore more regulatory reporting hiring is expected,” he continues. “And as far as IT hiring is concerned, more system complexity and reporting will likely have a positive impact on demand for IT specialists.”
Nulty also points to the fact that although the deadline for ringfencing is 2019, some elements of the competition side of the Report will come in in 2013, which means that movement will need to be made quickly. “I think you will see a rise in the demand for compliance people as a result of this,” he says.
While it is easy to be optimistic that jobs may be created in certain areas, we mustn’t lose sight of the potential downsides. At the very least, uncertainty over how the changes will be implemented may leave banks reluctant to hire for certain positions.
Perhaps of a more significant concern are the estimated costs of implementation of between £4bn and £7bn, which will have to be met somehow. As Kevin Mountford, Head of Banking at MoneySupermarket.com, points out: “The main concern of these recommendations is the additional costs on the banking sector, which could either be passed on to customers in some shape or form, or see a number of banking operations moving their head offices away from the UK.”
With the government wanting to protect the end customer as much as possible, it is likely that they wouldn’t allow costs to be passed on in that way, so it will be down to the banks to find a resolution.
eFinancialCareers’ Bennett believes that some redundancies may be inevitable. “The new UK capital requirements are far higher than those for international rivals, and will leave British banks at a disadvantage,” he says. As Evolution analysts pointed out recently, RBS has already reduced its risk appetite in global banking and markets, and cited this as a reason why its revenues decreased last quarter. Falling revenues means redundancies, especially in sales and trading.”
With the Report only out a matter of weeks, it is plain that there is uncertainly on one hand about how things will play out. Yet there is still cause to be optimistic that in this new world of banking, there will be opportunities for those willing to take them.
Nick Kirby is a freelance financial services journalist. He is Editor-in-Chief of businesslife.co.uk and a regular contributor to Barclays Smart Investor Magazine
and Lloyds TSB Ideas
magazine.