HSBC Hits Fresh Hurdle Over Ring-Fence Plan

HSBC's plans to segregate its UK retail banking operations have hit a fresh obstacle after regulators indicated that a prospective candidate for the division's chairmanship would be ineligible for the role.

Sky News has learnt that HSBC had held preliminary talks with the Prudential Regulation Authority (PRA), during which it indicated that it may want Alan Keir, the chief executive of HSBC Bank plc, to chair its new ring-fenced bank.

Under new rules drawn up by Sir John Vickers' Independent Commission on Banking in 2011 and due to be implemented in 2019, large UK lenders will have to ring-fence their retail operations from riskier investment banking activities.

The PRA has begun consulting on the governance requirements that will be imposed on ring-fenced banks, with its proposed rules stating that a director would be unable to hold a chair position if they have been an employee of either the ring-fenced body "or of any other member of its group within the period of five years before his or her appointment as a director".

Sources said that HSBC had informally raised the possibility of a waiver that would enable an executive such as Mr Keir to take up the role of chairman at the ring-fenced bank.

Without such a waiver - for which banks cannot formally apply until the full scope of the new rules has been set out by the PRA - neither Mr Keir nor any other current or recent HSBC executive would be able to chair the ring-fenced bank.

The indication from the regulatory wing of the Bank of England is understood to have prompted HSBC to begin an external search for board members for its ring-fenced bank, even as speculation grows that Europe's biggest lender will spin off its UK business.

HSBC is examining the prospect of rebranding its UK operations under the Midland name it took on when it bought the bank in 1992.

Speaking at HSBC's first-quarter results two weeks ago, Stuart Gulliver, its chief executive, warned that while a decision had yet to be made, the ring-fencing framework would make it "very difficult" to exert sufficient influence over the UK operation to justify retaining ownership of it.

Mr Keir joined the international wing of the Midland in 1981 and has held some of HSBC's most senior executive roles during the last five years.

The dilemma over the governance of its ring-fenced bank is not the first time that HSBC has been presented with a headache by Bank of England reforms.

The PRA's new Senior Managers Regime, which reverses the burden of proof for directors of failed institutions, last year prompted two directors of an HSBC subsidiary to consider resigning.

Douglas Flint, HSBC's group chairman, also wrote to the Chancellor, George Osborne, and senior regulators to urge them to delay the ring-fencing timetable until after the outcome of a competition inquiry into the industry is clear.

The PRA is likely to publish in the coming weeks more details of the segregation plans, according to City sources.

Andrew Bailey, the regulator's chief executive, said in recent days that it was logical for HSBC to review the location of its headquarters, which the bank announced last month it would do.

A committee of executives, led by Mr Gulliver, will report to HSBC Holdings (Xetra: HBC2.DE - news) ' board on the review later this year.

The bank's directors have become increasingly concerned that industry-specific taxes and the future shape of regulation are making it uneconomic to remain based in the UK.

HSBC, which has been under pressure from regulators and politicians over a Swiss tax evasion scandal which re-emerged in February, will face significant obstacles if it does decide to move its headquarters, almost certainly back to Hong Kong.

It now employs more than 47,000 people in the UK, 1,000 of whom are to move to Birmingham as part of a recently announced relocation of its UK bank head office.

Mr Gulliver said that only a small fraction of the 47,000 would be affected by a relocation of its head office.

Prior to the banking crisis, HSBC undertook a review of its domicile every three years, but has not done so since 2010 because of the shifting regulatory landscape.

Mr Osborne recently said that the Bank Levy, introduced in 2010, was now regarded as a permanent fixture of the tax system.

An HSBC spokesman declined to comment on its discussions with the PRA.