Banking Reform:The people, organisational, and cultural impacts of moving to a ring-fenced bank

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Banking Reform: The people, organisational, and cultural impacts of moving to a ring-fenced bank

Banking Reform – Background

The 2008 banking crisis has led to a global rethink of how to ensure resilience in the banking sector, reducing the likelihood of any future crisis through increased regulation of banks, and reducing the severity of impacts by changing how banking institutions are structured.

The UK Government is pressing ahead with reforms intended to reduce taxpayer exposure to future banking losses and to protect retail customers in the event of future shocks. To meet this goal the Independent Commission on Banking (ICB) was appointed by the government to provide recommendations (aka ‘The Vickers Report’) to create a more stable and competitive basis for UK banking in the long term.1

In 2012 the ICB published a white paper on banking reform recommending that a retail ‘ring-fence’ should be implemented to erect a legal and operational boundary around retail banking and business banking operations, thus separating them from riskier activities such as investment banking.2 The aim of introducing this ring-fence is to make it easier to resolve issues for ring-fenced banks and non-ring-fenced banks if they encounter difficulties. It will also curtail government guarantees against the non-ring-fenced bank, thus reducing the risk to public finances.

In 2013 the UK Government introduced legislation for ring-fencing3, and secondary legislation was passed in 2014 requiring all banks with £25m assets or greater to separate their organisation.4 In support of this legislation a number of consultations have been held with key UK financial institutions, with the aim of clarifying:

• The ‘perimeter’ of the ring-fence – e.g. what parts of the organisation will need to sit within the ring-fenced bank (RFB); and

• The ‘height’ of the ring-fence – e.g. what level of organisational separation is required between the ring-fenced bank and the non-ring-fenced bank (NRFB).

IntroductionBanking reform is one of the most significant changes currently impacting UK banking and will continue to be so for the next four years and beyond. The organisation, people and HR implications of ring-fencing are substantial. So far, most banks have started addressing the contractual and structural implications of banking reform, but the people impacts will be much broader across the culture, employee value proposition and all HR services. While all banks are approaching the ring-fencing question differently, there are lessons to be learned and applied from previous structural changes within financial services.

Now is the time for HR and people leaders within the industry to engage with this regulatory transformation, helping to keep the changes required as simple as possible while planning for successful delivery against the competing regulatory and internal requirements.

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1UK Government Policy: Creating stronger and safer banks, 24th April 2013, https://www.gov.uk/government/policies/creating-stronger-and-safer-banks 2 The Independent Commission on Banking: The Vickers Report, September 2011, http://www.parliament.uk/business/publications/research/briefing-papers/SN06171/the-independent-commission-on-banking-the-vickers-report-the-parliamentary-commission-on-banking-standards

3Financial Services (Banking Reform) Act 2013, http://www.legislation.gov.uk/ukpga/2013/33/contents/enacted 4The Ring-fenced Bodies and Core Activities Order 2014, 24 July 2014, http://www.legislation.gov.uk/uksi/2014/1960/pdfs/uksi_20141960_en.pdf

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Industry Response

These concepts have been interpreted differently by each of the UK banks impacted by the reforms, but all have identified a need to make some changes to the organisation to comply with the legislation as required by 20195.

Each bank is working independently to determine the right approach to comply with the legislation, considering a number of factors including, but not limited to:

• Impact on capital, liquidity and asset/liability matching within the RFB and NRFB

• Client considerations, including customer preference and product split between entities

• Operational complexities such as existing legal entity and banking licence structure

• Technology considerations and appetite to implement large organisational change

A key consideration is how each bank’s operational and corporate core functions, including HR, will provide services to both the RFB and a NRFB (see Figure 1). Currently the ‘Shared Service’ and ‘Operational Subsidiary’ models are emerging as desired targets for consideration, with little desire for full ‘Operational Separation’ because of the costs of fully separating shared services and technology.

The analysis of each of these models is ongoing, and it is likely that banks will adopt a hybrid approach in an optimised manner across their emerging operating model.

People, Culture, and Leadership Impacts

Most banks are coming to terms with what their response to ring-fencing means for their customer proposition, operating model and legal structure. Often this has been focused on the legal and compliance consequences of introducing the ring-fence. However, some of the biggest impacts within the bank will be on the people, culture and leadership, and it will be these areas where the success or otherwise of ring-fencing transformation will be felt internally.

While the detail of some of these impacts will be determined by the finalised regulation, any changes to the height of the ring-fencing perimeter will not remove the need for clarity of the governance, accountabilities and culture required to be embedded in the different legal entities. Each entity should have full and effective corporate governance, and a culture that meets the new requirements expected within the differing ring-fencing structures.

If the organisation, culture, and people impacts of ring-fencing are not addressed now, banks will incur additional risk during the transition period, and risk a substantial loss in performance of the bank after ring-fencing. Many of the affected banks are making progress in addressing some of

Figure 1.

“Shared Service”RFB NRFB

RFB Clients, channels, products

NFRB Clients, channels, products

RFB Control functions

NFRB Control functions

Support Functions, Corporate Core

Shared Service

25Financial Services (Banking Reform) Act 2013, http://www.legislation.gov.uk/ukpga/2013/33/contents/enacted

“Operational Separation”RFB NRFB

RFB Clients, channels, products

NFRB Clients, channels, products

RFB Control functions

NFRB Control functions

RFB Support Functions, Corporate Core

NFRB Control Functions Corporate Core

“Operational Subsidiary”RFB NRFB

RFB Clients, channels, products

NFRB Clients, channels, products

RFB Control functions

NFRB Control functions

Support Functions, Corporate Core

Operational Subsidiary

the more immediate people challenges arising from ring-fencing, with an initial focus on the impacts to employee contracts, pensions and employing entity.

However, to meet the full challenges of ring-fencing there are a number of additional activities and areas of focus that will need to be led or supported by HR. HR directors should now be asking themselves whether their function is fully ready for all of these challenges, and to understand to what extent they should be leading and supporting transformation design and delivery across 5 key areas of impact (Fig 2).

There will be temptation within organisations to use the large-scale change required for ring-fencing as an opportunity to address long term challenges within HR; for example, looking at the harmonisation of T&Cs as part of the movement of individuals between legal entities. Given the size of delivery challenges expected for the ring-fencing requirements, a balance will need to be reached between the advantages of addressing long term issues against the imperative to maintain a grip on delivery scope. Many of these additional opportunities will only be feasible if they are baked into the transformation from the start, which is only possible if there is early engagement and leadership from HR.

Our view is that banks will need to address these ring-fencing challenges across three different lenses:

• Delivering affective organisation, corporate governance, culture and leadership changes

• Ensuring the HR and people operations in the target organisations are fit for purpose

• Managing transformation delivery to move to the target HR, people and organisational framework

In the following sections we highlight the five key areas for consideration and provide a starting point for you to consider these in your organisation.

Figure 2.

Ring-fenced Banking - People Impacts and Considerations

1. Optimising the organisation for ring-fencing• Target OD and Operating Model

• Role Design

• Op Sub Setup

• Physcical Impact on Global / UK HQs

2. Creating strong leadership and governance• Cultural alignment

• Op Sub Service Culture

• Leadership

3. Readying the HR function• HR Operating Model

• HR Systems

• HR Contracts/Supports

4. Managing your people across the ring-fence• Recruitment and on-boarding

• Succession and talent

• Data security and separation

• Pensions, Reward and Payroll

5. Mitigating the transition and change execution risk• Workforce Planning and selection into OD

• Employee data collation and management

• Attrition and poaching between RFB/NRFB/Op Sub

• Contracts and T&Cs

• Data monitoring and outcome tracking/reporting

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All banks will need to adjust or implement a new operating model and supporting organisation design for the ring-fenced bank, the non-ring-fenced bank, and the operational subsidiary where applicable.

This will involve not just establishing clear roles and structures, but also determining how the different component parts of the bank continue to interact and work together to serve customer needs effectively. Effective governance, management processes and service management will need to hold these parts together. Each entity will require clearly defined accountabilities, and strong lines of defence.

In an era where most banks are under cost pressure and pursuing simplification initiatives, it is essential that HR takes the lead in ensuring the organisation design is efficient, being both appropriately structured (i.e. spans, layers) and sized (i.e. workforce / capacity planning).

New and modified teams and roles will need to be established. For some organisations this will be an

opportunity to clean up complex matrix organisations to achieve a simpler and more streamlined way of working. Managing these workforce changes will be challenging – this is addressed in section 5.

Probably the greatest organisation impact will be felt in teams moved into an operational subsidiary or teams serving both the RFB and NRFB. Within the organisation design, the split of responsibilities will need to be determined in order to make sure that the entities are able to demonstrate independence and prove that there is not RFB reliance on NRFB resource. Lessons can and should be learnt from how existing BPO providers service different clients, providing logical separation of services.

One key practical implication of the ring-fenced organisation is where the RFB will be based and the workspace implications. A number of banks are exploring separate sites, which will include office movement and in some cases employee relocation.

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1. Optimising the organisation for banking reform

Leadership and culture have been heavily criticised within financial services. Significant effort has been applied to improve the ‘tone from the top’. Ring-fencing further complicates this situation at board level and below.

Most banks will continue to promote stronger and more ethical leadership and cultures within all areas of their bank. However the separation of the organisation into two or three parts will likely be supported by a desire to engender differentiated cultures in different parts of the target structure. The challenge for the board will be to understand where differentiated culture and behaviours will be desirable, and where it will be beneficial to maintain shared values and behaviours.

The shared governance that continues to span the whole bank and the governance of the individual parts will need to be reset. In all likelihood, new executive boards and committees will need to be established for the separate entities. Again, this provides most banks with an opportunity to clarify governance and decision making. For HR a particular consideration is whether to have one or multiple remuneration committees.

Risk management within the new organisation will need to be reset. In most cases there will be ‘first line’ business

risk owners and management within the two banks. Clarifying operational control, and thinking through the implications of organisations putting second and third line control functions into the legally-separate operational subsidiary becomes a particularly thorny governance challenge. Likewise the challenge of maintaining consistency of risk and compliance practice is a problem that needs addressing whatever configuration of legal separation is enacted.

Finally, leaders must understand how ring-fencing will impact implementation of the Senior Manager Regime and Certification Regime. The new regime requires clear accountabilities at a board level, and down the organisation – this will change during ring-fencing and it is essential there is a clear point where these accountabilities are formally transitioned into the different entities. It is likely that the different UK-based entities will need separate responsibility maps, and there will be an increased number of Senior Managers and individuals who need to pass the bank’s ‘fit and proper’ test – a particular challenge where this test is not currently well defined and implemented.

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2. Creating strong leadership and governance

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Like all the other corporate functions, there is an active discussion around whether HR should sit in each bank, serve both banks from the operational subsidiary, or a bit of both.

For HR teams moved into an operational subsidiary, there will be a substantial challenge of moving from the ‘back office’ or ‘head office’ to being in a service company. For many professionals used to being close to their businesses, this will feel like a different world.

For HR teams moved under the RFB (the ‘Shared Service’ model above) the change will be less marked, but there will still be a need for more focus on the service provided to a different legal entity.

Moving to a service culture, including how to manage disputes and contract requirements across the RFB and NRFB will be an important change to embed. Particular care and attention is required to promote the right level of collaboration across the organisation boundaries without compromising the ring-fence.

As noted within organisational effectiveness, HR will need to develop or enhance the capability to manage a continuous certifications process across each of

the legal entities. This will need to encompass not only capability and qualification assessments, but also appropriate use of performance management and external or cross-entity benchmarking.

Whatever the model chosen, it is vital that the HR function is operationally ready to support transition and then for the future of the RFB, NRFB and any Operational Subsidiary, with the capability to provide high-quality services and advice. To support the operating model, banks will need to continue with their provision of HR systems to all entities, including logical separation where there is a need for different policies and processes to support RFB and NRFB colleagues.

Additionally, HR services provided by third party suppliers will need to continue (e.g. healthcare, benefits, pensions, learning, recruitment, contingent workers, HR systems, outsourced HR services etc.). However, HR will need the support of procurement and legal teams to re-structure these contracts to enable and control servicing across multiple entities, without losing the commercial leverage of being a single buyer.

3. Readying the HR function to support the segregated bank

Banks will need to review people processes and the employee value proposition – and how these need to differ given the business strategy and differing workforces of the RFB, NRFB and any Operational Subsidiary. These differences have always been there between wholesale and retail banking workforces, but after ring-fencing people strategies are likely to become more and more distinct.

One key challenge with serving two banks will be the potential for unnecessary and unintentional divergence of HR strategy, processes and policies. This has the potential to generate greater cost and operational risk especially within shared services. Increasing use of software-as-a-service and HR systems in the cloud (e.g. Oracle HCM Cloud, SAP SuccessFactors, Workday etc.) will put limits on the level of process divergence.

Differing capital, risk and return pressures on the different parts of the bank mean it will be important to drive appropriate differentiation for leadership career models, remuneration and value proposition. The different requirements should lead to different rewards and incentives between the ring-fenced and non-ringfenced banks, and particularly any operation subsidiary. Managing this effectively will either hugely increase the remit of the remuneration committee, or else require this committee to be duplicated for each of the legal entities.

Succession and talent processes will need to change. A key aspect of the future health of leadership, will be how banks help their future leaders ‘growing up’ in different parts of the bank understand the whole bank. Siloed talent is an

issue already in many banks today and ring-fencing could exacerbate this further. Banks should pay particular care to any unbalancing of talent away from the ring-fenced bank.

Banks will need to understand any necessary transfer of liabilities across the different corporate entities, in turn managing communications around pensions and rewards transition, including the separation of payroll financing. Remuneration plans must be carefully leveraged to mitigate any incentive conflicts that may arise for employees serving different entities.

It will be important for Banks to ensure the logical separation of employee data across entities and to maintain a central view of which employees are tagged to which entities, including new joiners, leavers and internal transfers. Employee data must be stored securely and separately accessed across entities, without disrupting existing systems and processes.

During the ring-fencing transition, consistent recruitment and on-boarding process will be required across the group, including managing transfers between entities during and after separation. Employee data and position management will be under the spotlight even more than normal, with an increased need for accurate and timely monitoring and reporting. An improved understanding of the key employee data and metrics will also help effectively manage and monitor the employee transition into the new bank structure.

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4. Managing your people across the ring-fence

HR teams need to be ready to manage significant and ongoing change within their organisations and to their services over the next four years. This needs to be done at a time when there is already unprecedented change in the organisation driven by regulation, digital disruption, and cost reduction. To deliver this HR need to be effective change leaders and build up their own change capability.

HR need to help shape the ring-fencing change agenda more than is currently happening in most banks. HR leaders will need to highlight and guide their business on the people, organisation, culture and HR implications of this change – or these decisions will be made without their advice and counsel. In doing this HR leaders will find uncertainties around important questions such as business model design, operating model design (predicated on the ‘height of walls’ assumption) and employing entity structure.

HR also need to be ready to deliver much of the ‘heavy lifting’ around ring-fencing change. The HR function in most banks will need to create programme teams for specific HR workstreams (e.g. employee transition), but also in support of other workstreams that have a high people impact. This team will need to execute to a well-conceived and managed plan – while four years is a long time the changes are widespread and substantial.

Some employees within corporate core and central functions or ‘borderline’ parts of the business will not have an immediate fit into the RFB or NRFB, and will need to be selected into the appropriate entity based on capability and business demand. Some form of consultation may be required with possible TUPE requirements depending on the degree of separation implemented between entities. This may highlight existing issues regarding terms and conditions discrepancies and contract availability. In our experience there may well be challenges identifying employees’ original contracts and T&C changes may be required if transferring to a new entity. Some banks will embark on harmonising and re-issuing contracts for all employees, but this will need to be controlled carefully in order to retain control of programme scope and risk.

HR need to look ahead to embed the change in the new organisation after transition. HR teams will need to deliver effective employee communications and change management throughout the organisation and employee transition, including differentiated approaches for separate workforces and entities. As for any long term change, tracking employee feedback, resistance and response to the change will be essential.

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5. Mitigating the transition and change execution risk

Lessons Learned from other large organisation changes in Banking

Lessons learned from recent banking divestment and integration activity will be applicable to ring-fencing:

Example 1 – Retail DivestmentThis divestment of a retail bank encountered a number of HR challenges similar to those expected within ring-fencing, including terms and conditions alignment, TUPE data management and control, operating model design, and payroll/pensions impacts. Key lessons learned from this multi-year programme include the importance of ‘border control’ to track employee movements (both before and after the separation), a support mechanism for employee queries following T&C announcements, and establishing new delivery and service agreements for pensions and benefits. A key challenge that was not expected at the outset was the difficulty in developing an understanding of the ‘current’ state of employee T&Cs, with significant effort required to capture all existing terms as a pre-requisite to the TUPE and T&C harmonisation activity that was a core component of the HR programme delivery.

Example 2 – Integration in Investment BankingFollowing a merger of two large IB entities, a three month timeline was set to deliver a transformed HR service, including an integrated HR service delivery

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model, and benefits, payroll and HR system changes. Integration impacts were quickly identified and developed into the integration management plan, with mitigating actions put in place to manage the employee experience throughout the change journey. A key lesson learned was the need to establish early decision making guidelines around employee benefit plans and the importance of developing, validating, and efficiently executing a multi-step conversion plan for benefits enrolment.

Example 3 – Separation of Wholesale and Investment BankFollowing a major European acquisition this bank chose to carve out the wholesale and investment banking business from the rest of its operations, requiring complex business, technical, organisational and cultural separation activities. A key challenge for the business was design and delivery of a new business operating model for the standalone entity, including creation of more than 400 new business processes, and training of 700 employees to use these new processes within the integrated service model. A key lesson learned was the need to establish a strong change team at the outset of mobilisation, limiting any disruption and negative impact on the business, employees and clients.

With the full picture of the impact of ring-fencing becoming clear, now is the time for HR and people leaders within the industry to seize the initiative and engage with this important change. This will enable HR leaders to protect the people and culture within the bank from the potential negative impacts of ring-fencing, and will ensure HR has its own services and change capability ready for this significant transformation.

If you would like to discuss how your organisation and HR team can address these challenges, please contact Andy Young (andrew.s.young@accenture.com), John Watson (john.watson@accenture.com), Tim Cody (tim.cody@accenture.com) or David Parker (david.m.parker@accenture.com).

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Ring-fencing is one of the most substantial changes to impact UK banking this century, and will be a major issue for the next four years. The organisation, people and HR implications of ring-fencing are significant, and HR Directors should be taking a lead from an early stage, and not leave key decisions impacting the bank’s people agenda to be made without clear and joined-up direction being provided by HR.

The impact on the bank’s people agenda will be seen across 5 areas: Organisation Design, Leadership & Culture, the HR Function, People Processes, and Transition Capability. Throughout the ring-fencing transition HR will be responsible for taking positive steps in all 5 areas and mitigating the significant people risks and impacts, as well as ensuring that the bank learns the lessons from previous structural changes within financial services.

Conclusion

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David ParkerHead of UKI Bankingdavid.m.parker@accenture.com

Andy YoungManaging Director, UKI Bankingandrew.s.young@accenture.com

Tim CodyManaging Director, UKI Bankingtim.cody@accenture.com

John WatsonSenior Manager, UKI Bankingjohn.watson@accenture.com