Some of the UK's biggest banks are seeking teams of up to 60 magic circle lawyers as they grapple with new ringfencing regulations that will force them to split their investment and retail banking operations.

Banks will have to ringfence their retail arms from riskier investment activities by 2019, following recommendations made in 2011 by John Vickers that are intended to protect the public in the event of a bank failing by ensuring retail operations are unaffected.

With banks anticipating spending as much as £1bn on the structural changes required to comply with the new regulations, many law firms have already won advisory roles, and this number looks likely to increase.

Legal Week reported this week that Slaughter and May and Addleshaw Goddard are acting for Barclays, Allen & Overy (A&O) and Norton Rose are advising HSBC and Linklaters is  believed to be advising both Lloyds Banking Group and the Royal Bank of Scotland.

Commenting on the strategic mandates thrown up by ringfencing, A&O London banking partner Bob Penn (pictured right) says: "There aren't many firms that can do it – you'll need teams of 50-60 corporate lawyers."

Other roles for lawyers beyond the core restructuring work include advising the board of the newly created ringfenced banks and due diligence work.

National or regional firms may be "better placed" geographically to pick up some of the work, says TLT investigations and enforcement head Jake McQuitty, who previously held the same role for Barclays in Europe and the Middle East.

"Advice on issues concerning core retail banking services could involve engaging national or regional firms." 

Ringfencing is also "biting" many other smaller banks, says Herbert Smith Freehills (HSF) financial regulation partner Nick Bradbury.

The ringfencing rules will affect any bank with more than £25bn of deposits.

"It has quite a disproportionate impact on them on which they need advice. The fact they don't have risky investment banks doesn't matter; their retail deposit business still has to be ringfenced in a separate entity."

Warming up

Although banks have been preparing for ringfencing for a while, the legal work is set to kick off in full this year, says Penn.

"The legal work will be really beginning in earnest this year and the big banks are starting to warm up."

Slaughters' head of financial regulation Jan Putnis (pictured) adds:"The amount of legal work will be ramping up over the next 12 months."

Given the scale of change required lawyers are bracing themselves for challenging work.

"It is far more time intensive, difficult and costly in terms of legal expenditure compared to M&A," Penn says. "It is akin to micro surgery involving a huge amount of diligence and detailed design and implementation, including splitting banks' IT systems."

Pinsent Masons banking partner Tony Anderson comments: "Defining the new relationships created between ringfenced and non ringfenced entities is a huge task alone."

The work is also expected to continue beyond 2019.

"I fully expect there to be a long tail of work that hangs off and things to sweep up after. It's a big, messy job," comments one City banking partner.

As part of the overhaul banks will also require two general counsel, one for the investment banking arm and one for its retail operations.

"There will need to be some separation. Each ringfenced bank will need its own general counsel, for example, to be capable of acting independently," Penn says.

Making matters more complicated is the possibility that political developments could throw the whole process off course.

The UK is set to have a referendum by the end of 2017 on whether or not to remain a member of the European Union (EU).

But as long as the UK remains a part of the EU it is possible that it may have to "reverse its ringfencing and adopt whatever the EU requires instead," says Clifford Chance London banking partner Simon Gleeson. "We still haven't really worked out what the European position is. There's no formal timetable but I'm reasonably confident we will know by the end of 2016."

Putnis comments: "Although it is not thought very likely that EU law will upset UK ringfencing plans significantly, it wouldn't take much of a change to the proposed EU regulation on structural reform for this to happen."

And while many UK law firms are in a good position to benefit from more work, some lawyers are sceptical about the ideas behind ringfencing.

Penn says the benefits are "at best unproven" while Putnis adds that the "most charitable" description of ringfencing is: "an interesting experiement".

Unfortunately, as partners admit, it will only be possible to properly evaluate the results of the experiment if there is another banking crisis.