Platform

The publication of the Banking Reform Bill is the beginning of the creation of ring-fenced banks as recommended by the Vickers Report.

Banking groups will now be looking at how to restructure their group operations to meet the new requirements. Operationally, this will most likely still require basic internal platforms and services to be shared by both the ring-fenced entity (RFco) and the non-ring-fenced entity (NRFco).

The best options seem to be for a separate group operating company (opco) subsidiary to support both entities; or, for RFco to hold the opco business itself and to make it available to NRFco on arms length terms.

The acid test will be whether the opco arrangements remain available to RFco when NRFco is insolvent. It's not clear that this can be established with any certainty, especially if the opco subsidiary structure is followed.

It is clear that current accounts, overdrafts and retail deposits may be products handled only by RFco (except for deposits placed by high net worth customers, which may be allowed in

NRFco) and that investment banking products will only be available through NRFco (but simple derivatives may be offered by RFco). All other products could conceivably be sourced from either entity.

So, customers will be faced with two potential relationships, though it is possible that RFco could end up acting as agent for NRFco in selling its products. Will there be any element of competition between RFco and NRFco here?

Overall, is this structure going to result in a better experience for customers? The ring-fence is clearly intended to limit the likelihood and costs to Government of a future rescue being forced on it by making sure it won't pick up the tab for investment banking failures. So in that way it benefits all of us.

But presently it's not clear where large corporate, small corporate or commercial customers will prefer to place their business, or indeed if there is going to be a genuine choice.

As the detail unfolds, some aspects may become clearer. But many will be asking whether it would be easier to have a complete separation of the businesses, rather than just a ring-fence.

Michael StonehamPartner0131 656 0061michael.stoneham@brodies.com

Focus on... the ring-fenceThe Financial Services (Banking Reform) Bill was published in February with a policy document, Banking reform: a new structure for stability and growth, explaining the content of the Bill and identifying the likely costs of implementation.

Earlier this month the Parliamentary Commission on Banking Standards issued its second report, which comments on the Bill and the policy document.

The Bill deals with the implementation of ring-fencing. It sets out a structure of core activities, core services and excluded activities, and provides for the necessary regulatory oversight. Yet much of the detail is missing, left to HM Treasury to develop through secondary legislation. It had been hoped that this detail would be available when the Bill was published.

The papers debate policy issues on construction of the ring-fence. The Commission's first report advocated electrification of the ring fence, by giving the regulator power to order a formal separation of a banking group if it was not complying with the spirit of the ring-fencing rules. That concept has been included in the Bill.

Another Commission proposal was for regular independent reviews of the operation of ring-fencing that could lead to a full separation across the whole banking sector. That proposal has not so far been accepted by Government.

The proposed legal framework has been reviewed by the Financial Markets Law Committee in London. It concluded that there may be some incompatibility with EU law, there were uncertainties in the text of the Bill, and there was an element of unpredictability about the location and height of the ring-fence.

Click on the links to read the policy document, the Commission's 2nd report, and the FMLC report.

Your regular Scottish Banking & Financial Services bulletin from Brodies LLP

Hadrian’s Wall

The Scottish Government's Fiscal Commission Working Group reported on the Macroeconomic Framework for independence last month.

The report includes its proposals for the future financial regulation of an independent Scotland. The regulatory landscape at a UK level is, in any event, changing as from April 1, with the introduction of new regulatory bodies in the place of the FSA and the resumption of a core role by

the Bank of England. The EU is also developing plans for a banking union based on four pillars.

Against this background, the report concludes, sensibly, that it is likely to be in the interests of all parts of the UK that there remains a common and consistent basis of regulation for financial institutions across the UK.

This translates into a proposal that the Bank of England would be the macro prudential regulator (on the basis that Scotland will be in a sterling currency zone) and will coordinate significant micro prudential regulation

for the Scottish Government or through a Scottish Monetary Institute.

Consumer protection and other conduct of business issues could be handled by a separate Scottish financial regulator or by a Scottish office of a sterling zone regulator.

This seems a pragmatic proposal, given that establishing a full local regulatory capability from scratch would be a challenging task. Click here to see the relevant pages extracted from the report on these matters.

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Christine O’NeillPartner0131 656 0286christine.oneill@brodies.com

Market ReportsBusiness leaders Brodies has been celebrating the prestigious award to managing partner Bill Drummond of UK Management Partner of the Year at the Legal Business Awards 2013 in London. This followed our selection as the Scotland Law Firm of the Year at the Who's Who Legal Awards 2012.

Bill, recently re-elected as managing partner for a sixth consecutive term, won the award in the face of stiff competition, with Allen & Overy's senior partner coming in as runner up. In the same month he has been appointed Chairman of the Scottish Council for Development and Industry after three consecutive terms as the Deputy Chairman, extending the influence of Brodies even deeper into the Scottish business market.

Click here for some current information about the current standing of Brodies and the strength of its banking team.

Business bankers The renowned former Scottish banker Sir Peter Burt is now helping the UK Department for Business, Innovation and Skills as chair of its Business Bank advisory board. The members of the advisory group have now been selected to advise on the direction and priorities of the Business Bank.

The aim is to find a solution to the SME finance problem. The major focus is on getting money into the sector immediately as well as laying the foundations for a long term provider of support for SMEs. We wish Sir Peter every success with this latest example of a state investment bank.

Business as usual Our commercial banks, assailed by capital and regulatory requirements and ring-fencing, are keen to assure all that they are open for business and that new lending is only held back by lack of demand. So there is good news for them from Basel, where the committee looking at global banking supervision has decided to delay full implementation of proposed new liquidity rules until 2019 (instead of 2015).

These are the rules proposed to protect banks against the sudden, unforeseeable loss of liquidity which undermined Bank of Scotland and others in 2008 when the wholesale interbank funding markets seized up. This, with the Funding for Lending Scheme, which is meant to reach SMEs as well as mortgage borrowers, and the focus of the Business Bank, means that it really is now just a question of locating that elusive demand.

SnapshotIain Walker,

Banking Trainee01224 392 267

iain.walker@brodies.com

Iain joined our Aberdeen banking team as a trainee in August 2012 as his first seat with Brodies. Between university and starting Brodies, Iain had a year in industry, working for an international supplier of power marine and locomotive products. Since joining Brodies, Iain has worked on a wide range of transac-tions including acquisitions of marine vessels, property develop-ment finance, re-financings and most recently a management buyout of an oil services company.

If you weren't a lawyer, what would you be?

A football referee - because I spend enough time thinking that I could do the job better

What is the best advice you have received in your legal career to date?

Always consider the reality of a situation. From the start it has been clear that the advice does not just have to be of a high quality, it must also be pragmatic. You have to look at a situation from a practical sense as well as a legal sense. To come out of industry and become part of a firm which takes the time listen to its clients and understand the markets in which they operate has been a great experience.

If you were given a wild card entry for the Glasgow Common-wealth Games 2014 which event would it be for and why?

Diving. Top board. Cannonball… someone has to do it

Kilting CornerCounterparts Ahoy! - News reaches us that the Scots law rule that "counterpart signing of a document is not allowed" is likely to be altered. The English practice of each party signing a different copy of the same document allows for flexible signing arrangements in multi-party transactions, and where the signing agenda includes a Scottish document it has caused practical difficulties to say the least.

If these proposals, from the Scottish Law Commission, are enacted then life will never be the same again. The wider question of how to manage virtual signings or closings in the light of the English Mercury case (Mercury Tax Group v HMRC [2008] EWHC 2721) remains to be dealt with. This relates to the signing of documents printed off an email. The English Law Society has published guidelines - once counterparts are permitted in Scotland equivalent guidelines will be needed.

All Change for Charges Registrations – after several false starts, the rules on registration of company charges which date back to the 1990s and earlier will be changing from 1 April. As with the changes to counterpart signing, the aim is to conform so far as possible legal practice north and south of the border.

This has involved some complexity, in marrying up the very different concepts underlying charges in both jurisdictions – essentially bending the historic Scottish rules and language to fit with an English template. There will be changes needed to both the text in certain parts of a charge document and to the way in which registra-tion is achieved. One result will be that the whole charge document will be filed on the public register and available for inspection.

Further details of the changes can be obtained from andrea.fairfield@brodies.com.

Where Eagles Dare – Despite this trend to UK conformity, Scots law case judgments continue to be relevant.

The Court of Session case of Bagmoor Wind Limited v The Scottish Ministers concerned the refusal of planning permission for a 14 turbine wind farm in Glen Etive on the basis that the 19 pairs of protected golden eagles (aquila chrysaetos) - 4% of the known UK population - could be affected.

After lengthy argument and detailed review of the way the original decision was reached, the Court came down on the side of the eagles. Click here to read the judgment.

Aberdeen Edinburgh Glasgow Brussels www.brodies.com

Credo is the Latin root of credit and trust which emphasises the underlying credibility of the borrower's promise to repay; the foundation stone of our financial system. If you have any comments or questions on the content of Credo please email michael.stoneham@brodies.com or your regular Brodies contact. To unsubscribe please click here.

Christine O’NeillPartner0131 656 0286christine.oneill@brodies.com