PRA: large UK banks must have preliminary ring-fencing plans in place by year's end

The announcement came as the regulator, which is part of the Bank of England, published a consultation paper covering proposed changes to the legal structure of banking groups; governance; and continuity of services and facilities. Banks that take in more than £25 billion in 'core' deposits from individuals and small businesses must implement the ring-fence by 1 January 2019.

The PRA is also consulting on changes to enhance deposit holder and insurance policyholder protection, in line with new EU rules. It has also published a discussion paper on operational continuity in the event of bank failure.

"Responses to the consultations are due on 6 January 2015; the same date that banks which expect to be subject to ring-fencing must submit to the PRA and FCA a preliminary plan of their legal and operating structures," said banking reform expert Tony Anderson of Pinsent Masons, the law firm behind Out-Law.com. "The clock is now definitely ticking on having all ring-fencing requirements in place by 2019."

"Whilst the largest UK banks will already be well geared up for this process, it will be the smaller institutions and challenger banks which will need to be mindful of the ring-fencing requirements. Any proposed acquisition or merger which would result in the £25bn deposit threshold being reached will need to factor in the costs of ring-fencing as well," he said.

Under the Banking Reform Act, which created a legal framework for the 2011 recommendations of the Independent Commission on Banking, banks will be required to separate their retail banking activities from the riskier "activities associated with trading and financial interconnectedness" of the wider banking group. Ring-fenced banks will need to be legally and operationally distinct entities from non-ring fenced banks, and will not be able to hold or own the capital of other non-ring fenced entities within the group.

The PRA said that it expected banking groups that carry out both ring-fenced and "excluded" activities to adopt a 'sibling structure' of separate clusters of subsidiaries beneath the one UK holding company. It will set out rules on intragroup transactions and the risks to which ring-fenced banks may be exposed in a future consultation exercise, before finalising the rules in 2016, it said. No more than one third of the board members at a ring-fenced bank will be allowed to hold roles elsewhere in the group, to ensure that the ring-fenced bank can "take decisions independently" of the rest of the group.

Banks that expect the new rules to apply to their businesses should submit "a preliminary plan of their anticipated legal and operating structures" to the PRA and to the Financial Conduct Authority (FCA) by 6 January 2015, according to the consultation paper. Submitted plans should be "consistent with resolution planning and prudential standards", and should ideally include provisional balance sheets and profit and loss accounts for the UK holding company and the UK regulated entity, the PRA said. Firms should also submit a "project plan" setting out how they intend to transition to the preferred legal and operating structures, including "key milestones and decision points", the PRA said.

"Improving the resilience and resolvability of firms has been at the heart of international and domestic reforms since the financial crisis," said PRA chief executive Andrew Bailey. "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."