In June 2010 the UK Government announced the creation of an Independent Commission on Banking (the ICB) which was to formulate policy recommendations designed to reduce systemic risk in the UK banking sector and promote competition.

In April this year the ICB published its interim report and this has now been superseded by a final report published on 12 September 2011. Like the interim report, the final report recommended the retail ring fencing of UK "banks" (all types of deposit takers including building societies) but not total separation, increased capital requirements above Basel III and certain competition measures.

There has been some debate as to whether or not the retail ring fence applies to overseas banks in the UK and the position appears to be as follows: The basic principle is that the requirement to comply with the ring fence should apply to anyone carrying on a retail banking business as a "distinct legal entity" with permission from the UK's regulator (currently the FSA). The crucial point here are the words "distinct legal entity" which would include any standalone UK bank, any UK bank which is part of a wider banking group headquartered in the UK and any UK bank which is a subsidiary of a wider banking group headquartered overseas. UK branches of European banks would not be subject to the ring fence as a banking entity incorporated in one member state is entitled under European law to branch into another member state using its home licence (so called passporting).

In relation to third country banks in the UK, the ICB states that these could also provide retail banking services but that any such "significant" banks would generally be required to establish a UK subsidiary. It is not clear what the ICB means by the word "significant" as there is no de minimis exemption from the ring fence principles. However, some guidance might be taken from the recent joint paper published by the FSA and the Bank of England on the proposed new UK prudential regulator, the Prudential Regulation Authority (PRA) which stated that the PRA would allow a branch of a third country bank in the UK where it was satisfied that its supervision in its home state was broadly equivalent to that of the PRA and on which the PRA could rely. If not satisfied, the overseas institution would be required to set up a subsidiary. To my mind it would make sense if the same principle were applied to the ring fencing of third country branches.

The final report also states that the ring fence requirements would not apply to the overseas subsidiaries of UK headquartered banking groups unless they were subsidiaries of a ring fence bank.

Given the fundamental nature of its recommendations the ICB has suggested a fairly lengthy implementation date of the start of 2019 (the start of Basel III). However, the UK Government is keen to move forward and has argued for the need to legislate the main recommendations in this session of Parliament, even if implementation is delayed until after the 2015 election. However, whether this will be possible remains to be seen.