London: Any ambitions UK-based banking consultants had of winding down for a Christmas break have evaporated with the government's decision this week to endorse proposals from Sir John Vickers and the Independent Commission on Banking (ICB).
The ICB's report has far-reaching implications for UK banks, not least a return to the status quo ante-Big Bang, with a ringfence separation of retail and investing banking.
The consensus amongst banking consulting leaders is that the Treasury's decision is a watershed for the industry
Kevin Burrowes, UK banking leader, PwC, commented, "The increased clarity is welcome. No one benefits from uncertainty and moving the proposals quickly into legislation will help mitigate impact on credit supply, economic recovery, UK competitiveness and bank staff morale. There will naturally be concern about how reforms could affect the UK banks' ability to compete internationally, particularly given their considerable contribution to the economy and employment."
Consultants are concerned in particular that the timetable for change is very demanding.
Jon Pain, UK head of financial services risk consulting at KPMG, said, "The face and structure of banking has changed for good and we've reached a point of no return. This will be remembered as a defining moment for banks in the UK and work will intensify as business models need to be fundamentally overhauled.
"Banks should not be fooled by the ICB timetable as major banks will need to make some serious decisions before June to submit their recovery and resolution plans (RRPs) to the relevant authorities, which could have major implications for their ICB thinking.
"UK global, systemically important banks have six months to get their RRPs in order, or risk facing an additional capital resolution buffer both inside and outside the ringfence."
Julian Wakeham, UK capital markets consulting leader, PwC, said, "Banks have to provide regulators in the UK with their recovery and resolution plans by June 2012, and update them every year thereafter. These plans may provide a solid platform from which to deliver the Government's intended outcomes from the ICB.
"While preparing Recovery and Resolution Plans is the easy part, implementation is likely to present UK banks with substantial operational challenges.
"We shouldn't lose sight of the fact that, while ringfencing could help to isolate and limit risks, retail banking carries its own significant inherent risks to the economy."
John Liver, who heads up Ernst & Young's Global Regulatory Reform team, observed, "The introduction of ringfencing has to be seen in the context of wider regulatory reform around recovery and resolution planning as these two policy initiatives have significant overlap in the effect they will have on bank's operational models. During 2012, which is the FSA deadline for RRP, banks will need to make clear decisions about the direction of travel for their ringfenced operations to respond to the proposed legislation while implementing RRP to meet FSA timescales.
"The government's implementation of Vickers in full is the boldest regulatory step taken in Europe in this arena, but, the EU has also announced the establishment of a committee to look into banking structures.
"Within the ringfence one of the largest issues the banks will be grappling with is the challenge of changing their underlying business models. The ring fenced entity will need independence across operations, funding and governance and considerable work is needed to understand exactly which processes and products should be within the ringfence, how the ringfence and the other parts of the group interact and on what terms, and the profitability of different products and services on a standalone basis. We foresee that core elements of the existing retail business model such as free in credit banking could be challenged."