The Bank of England has released a series of proposals calling for structural reform that, it says, would make the financial sector more resilient and protect customers if deposit-takers or insurers fail.
The four papers, published today, are based on recommendations by the Independent Commission on Banking. This is legislation introduced by the UK government with the intention of “ring-fencing” core banking services from trading and other financial activities, so that they can be resolved, where necessarily, with as little disruption as possible. From 1st January 2019, all banks with core deposits over £25 billion will have to ring-fence these services.
To help banks prepare for the new requirements, The Prudential Regulation Authority is offering consultation on three elements of the policy: the legal structure of banking groups; governance; and continuity of services and facilities. Banks that are likely to reach the £25 billion threshold by the cut-off date are required to submit a preliminary plan of their anticipated legal and operating structures to the PRA by the end of this year.
Both depositors and insurance policyholders are intended to gain from the new legislation, according to the Bank of England. Customers will be able to continue to access deposits covered by the Financial Services Compensation Scheme even if their bank fails – and will be able to transfer funds to a different institution. For insurance policyholders that are faced with the failure of their provider, the proposals would extend FSCS compensation, raising the limit to 100% of cover for annuities, pure protection, claims arising from death or incapacity and professional indemnity insurance.
“Improving the resilience and resolvability of firms has been at the heart of international and domestic reforms since the financial crisis. Ring-fencing will improve banks’ resilience, by protecting them from shocks, and facilitate orderly resolution – both of which are needed for a stable financial system,” said Andrew Bailey, Deputy Governor of the Bank of England and Chief Executive of the Prudential Regulation Authority.
“These proposals will allow customers to have continuous access to the money in their bank account – or receive payment from the FSCS if this is not possible. Additionally, the increase in FSCS limits for certain types of insurance will mean policyholders who may find it difficult to obtain alternative cover, or who are locked into a product, have greater protection if their insurer fails.”
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