City battlelines drawn over ‘living wills’

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City advisers on Thursday sought to fend off a proposal to force banks to simplify their legal structures, saying reforms mooted by Lord Turner, chairman of the Financial Services Authority, would harm the competitiveness of the British industry.

But the idea was greeted with support from some bankers and analysts, underlining disquiet about complexity in the sector.

Lord Turner this week said the drive to force big banks to draw up “living wills” – to help their wind-down in the event of a collapse – would compel them to simplify matters. “Now we may have to demand clarity of legal structure,” he told the Financial Times.

Lawyers criticised the proposal, and said it would be costly and difficult to implement while putting UK-headquartered banks at a disadvantage. Some also objected to the FSA involving itself with tax issues.

Vimal Tilakapala, joint head of the tax practice at Allen & Overy, the law firm, called the proposal “exceptionally difficult and disruptive”. He added: “It is alarming. The FSA should not concern itself with maximising tax revenues from the banks – it is not within its remit. It must also be remembered that banks are businesses competing in a global market. You cannot expect them to structure themselves ... to generate as much tax as possible.”

Colin Hargreaves, head of UK tax at Freshfields, the law firm, said: “There is a risk of a blunt instrument approach. It would be better to make targeted changes in reaction to specific lessons from Lehman [Brothers’ collapse]. A one-size-fits-all approach to group structures could risk tilting the playing field when combined with different countries’ tax rules.”

Richard Collier, partner at PwC, the professional services firm, said the costs might outweigh the benefits and would raise concerns about competitiveness. “It could potentially be very expensive indeed,” he said.

But some applauded Lord Turner’s suggestions. “This clearly sounds like a good idea though it would affect different banks very differently,” an analyst said.

Lloyds, for example, is relatively simple, with 769 companies in the group last year. HSBC is the most complex of UK banks, with more than 2,000 entities in the group.

However, HSBC pointed out that it was structured as a group holding company, with self-sufficient local subsidiaries – holding independent capital and liquidity – in the jurisdictions in which it operated.

Such structures should make it easier for groups to be unwound in the event of collapse, making the writing of living wills easier and their terms easily implemented.

One senior UK banker backed the view that living wills would force a simplification of structures. “There should be three levels of planning,” he said. “First, there should be a clear disclosure to regulators of any assets that could easily be disposed of, in the event that a bank needed emergency capital and couldn’t go to the equity markets for it. Second, there should be protocols between different jurisdictions. And then regulators should take a look at corporate structures and make sure they are simplified in order to make the will actionable.”

However, analysts said that living wills, even if they were implemented, were likely to have a far less dramatic impact on banks’ use of local entities for regulatory arbitrage than would the drive to harmonise global capital requirement standards.

“I would imagine that capital regulations would have a more direct effect on the structure of banks’ operations,” said Sandy Chen, at Panmure Gordon. “A global harmonisation of those rules would go a long way to end capital arbitraging.”

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