In this part of our 'ring-fencing' series we look at the changes in store for HNW customers as the two British financial regulators force the largest banks to split their services between retail and the rest. The aim is to disturb customers as little as possible, but some will end up banking with different entities and opportunities might present themselves to fraudsters.

The general objective at which the Financial Conduct Authority and Prudential Regulation Authority are aiming is to ensure that customers need not do anything unless contacted by their banks. If the changes are going to affect them, the banks will tell them how and when, with advice about anything they might have to do themselves.

Why sort-codes are important

Some retail (i.e. HNW) customers will experience changes in account details, perhaps being given new sort codes. Some might have to talk to a “ring-fencing transfer scheme” about their legal rights.

Sorting codes are six-digit identifying numbers and are essential to the accurate routing, settlement, aggregation and financial reporting of payments. Banks use them in their internal IT systems that refer to data about customers, e.g. credit and transaction history systems. Ring-fencing requires retail customers to be separated from customers that “require excluded activities,” to use a regulatory phrase.

For some of the eight or so banks that are being ‘ring-fenced’ in the UK, this means a reorganisation of customers, products and services to ensure that they are served by separate legal entities with distinct sort-codes on either side of their ring-fences.

Some customers are experiencing changes to their account details (such as new sort-codes and account numbers) but the banks are going to ensure that outgoing payments such as standing orders and direct debits are updated on customers’ behalves and “made as normal.” They will also redirect payments sent to old account co-ordinates to the new ones.

One regulator (anonymous by request) recently told Compliance Matters: “If somebody sends over money to your old sort-code, it’ll go to your new one, using the CASS system. It’ll be redirected for a minimum of three years, plus 13 months after the last redirection took place on that account – actually it’s quite likely that the system will go on in perpetuity.

“Probably a million personal customers have been moved and CASS runs at about a million a year already. CASS will be able to redirect all money to new sort codes. Anything you use for Internet banking will go through that switching service. The banks will change standing orders themselves.”

Ring-fencing transfer schemes

A ring-fencing transfer scheme is a specific “transfer of business” process that enables banks subject to ring-fencing to separate activities and assets and to restructure their businesses to comply with the UK’s ring-fencing legislation. It is a multi-stage process in which a court decides whether to sanction each scheme. A ‘skilled person’ (not a firm but an individual who has yet to be appointed) will help the judge in the case of each bank to choose the legal changes to make, with the first hearings timed for November. He or she will assess the effects of each proposal for a scheme. People who might have to face changes from each scheme will receive letters from their banks which explain how that scheme works and how to lodge a complaint. The banks will consider objections and then the FCA and PRA will review those objections.

Banks, in other words, are preparing several major transfers of business that the courts will then have to sanction. These banks are having to do this with assets, liabilities, relationships with customers that are linked to the assets, and other things as well. In the case of one firm, the Scottish courts will decide on what ends up where; in the other cases, it will be the High Court of England and Wales.

At the moment, the regulators have no reason to suspect that they will be inundated with people sending in letters and asking questions, but in truth they do not know how many letters are going to come in. They do not know whether there is going to be one English judge only or several. There will, however, only be one Scottish judge.

A regulator (name withheld by request) told Compliance Matters: “There will generally be 3 to 4 months between each ‘court directions hearing’ and each ‘sanctions hearing.’ In a directions hearing the court will decide what to address and how firms should make relevant customers aware of the changes and give them a chance to reply. In sanctions hearing, the court will sanction the ring-fence transfer scheme when the assets will move from one legal entity to another. We hope that this process will be over about this time next year; maybe earlier.

“After the court sanction hearings there will be readiness monitoring, generally for one or two months, then will come the effective date for each ring-fencing transfer scheme. Generally six to nine months after this, we’ll reach 1 January 2019 – the date of ring-fencing implementation.”

Who regulates what?

The PRA is the leading regulator in the process. It supervises all banks that operate in the UK, it has now reviewed banks’ ring-fencing plans and is monitoring the way in which they are putting them into practice. It has made the ring-fencing rules that the banks are having to follow and it will report to Parliament about ring-fencing every year after 2019.

The FCA, for its part, supervises banks’ ring-fencing plans, approves regulatory transactions such as applications for new banking licences, and approves the appointment of various people. It also has a shadowy commitment to ‘provide input’ into the ring-fencing transfer scheme process. Its main interest in this, it says, is to offset harm to consumers or the competitive process. It wants customers with accounts at many banks (to whom it refers, rather amusingly, as ‘multi-banked customers’) to hear consistent messages.

Communication with customers

At the outset, the regulators decided not to promulgate a big campaign of their own and start widespread discussions with customers, but instead to leave communications with customers up to the banks. They do have a ‘communication strategy,’ as they call it, but mainly to reassure the public and minimise confusion. It talks to banks about their plans to communicate with customers on the subject, constantly reiterating various messages about the need to prevent fraud. They have invited the banks and consumer organisations to incorporate messages they have drafted into their own literature on the subject. The main message says to customers:

• Treat all letters, phone calls, emails and text messages with caution. don’t assume that they are genuine, even if the person seems to know some basic information about you.
• Do not give out your account or card details or make changes to payments unless you are certain about the person with whom you are dealing.
• Never disclose security details such as your personal identification number (PIN) or online banking password. Your bank or other genuine organisation will never ask you for these.
• Don’t be rushed or pressurised into making a decision or acting quickly. A genuine bank won’t mind waiting if you want time to think.

If you have any doubts at all about what you are being asked to do, check with your bank. Always use contact details you can trust such as the phone number on your bank statement.

Another regulator, also with an eye on ‘treating customers fairly’ or TCF, told Compliance Matters: “Some products will be manufactured outside the ring-fence and will be sold to the customers inside it. We’re looking at how to make it done on an arm’s length basis and ensure that customers are treated fairly.”