Further proposals for banking reform issued last month by the Bank of England are expected to cause significant internal restructuring of in-house legal teams, with some banks effectively having two separate legal functions.
Under the reforms, banks with core deposits greater than £25bn, including Barclays, HSBC, Lloyds Banking Group, The Royal Bank of Scotland, Santander UK and The Co-operative Bank, will from 2019 need to separate their retail banking function from the rest of their group, which will divide the activities in the legal team. Banks are currently in a transitional phase of determining where the line is drawn between retail banking and investment banking operations.
Speaking to Legal Business, Eversheds financial institutions partner David Boyd said these new proposals are an example of the increasing impact of regulation on financial institutions. The proposals are going through a consultation phase, which closes on 15 January 2016.
‘It might mean roles change, roles become redundant within legal teams and from a location perspective, some banks are taking the view that they ring-fence and move the retail bank outside London. That is having a very considerable impact within the legal teams on morale, but it’s also accentuating already tough resourcing challenges as we are seeing people leave in advance of those sorts of changes.’
According to Ashurst financial services regulatory partner Rob Moulton, the flexibility given to the banks to implement these changes means that some will have two different legal teams while others may choose to have a distinct legal function held in a separate third service company, which can continue to provide legal services if one part of the bank fails.
‘Everyone is going to have to grapple with the question of do we separate one legal team at the moment into two different teams with two GCs and entirely their own autonomy, or are we going to try to provide combined services to the two parts of the banking group in all or some areas?’
Providing combined legal advice will only be possible for issues at group level that are not entity-specific, or relate to specialist skill-sets such as employment or intellectual property. For all other matters, strict procedures and documentation will be put in place to detail terms of any co-operation between lawyers in both parts of the business.
Moulton added: ‘Things like shared services – who will own the intellectual property? Who will own the computer systems? It’s a bit like Scotland leaving the UK – you need to think about who will do these things.
‘Splitting a big bank in half is only probably one rung down in complexity from splitting a country in half. For the GCs, pulling this trick off will be career defining for many of them. It will be a five-year project to do the most complicated internal reorganisation that will have ever gone on within a UK company.’
The changes are also likely to cause a shake-up of preferred external advisers as a result of both the internal changes and any possible conflict issues that may arise from the new intragroup arrangements – for example, whether it is still possible to have the same firm acting for different parts of the bank and whether those relationships may be regulated. Even if a bank separates its legal function, its teams would still be able to use their combined purchasing power when carrying out negotiations with firms.
Pinsent Masons partner Tony Anderson added: ‘Panels will be addressed because of the fact there are internal changes – that’s natural. But internal sub panels within banks isn’t a new thing.’
Some banks have been putting pressure on the UK Treasury to water down the ring-fencing proposals, which go beyond European requirements and are among the most stringent in the world. One area of particular contention for Lloyds is the requirement that each part of the bank will need a different board of directors. Whether the group GC function will continue to exist remains at the discretion of each individual bank, however, if the bank chooses to separate its legal function, the role is unlikely to survive in the form that it exists in today.
kathryn.mccann@legalease.oo.uk