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By Steve Slater, Matt Scuffham and Huw Jones
LONDON, May 15 (Reuters) - British banks are still makingbig changes to how they will separate their retail businessesfrom riskier areas by 2019 as they juggle broader strategyshifts with regulatory demands, the UK's banking supervisor toldReuters.
To comply with a new UK law to better protect depositors andtaxpayers, at least six UK banks and building societies must setup firewalls around their retail bank by 2019. Banks have toinclude basic savings and mortgages in the ring-fenced businessand exclude other areas like complex derivatives.
The work on ring-fencing is going on in parallel with banksdeciding which lines of business they will stay in - a decisionthe regulator is also closely monitoring to make sure anychanges are sustainable and don't disrupt operations.
"Some of them are coming with quite big changes to theirplans, because they've had a think about it and revised theirview on where their business model is headed," Andrew Bailey,chief executive of the Bank of England's Prudential RegulationAuthority (PRA), told the Reuters Financial Regulation Summit.
Banks including Barclays, HSBC and RBS are in the process of restructuring to improveprofitability and cut costs.
"Their business models are adjusting so these are movingtargets," Bailey said.
The PRA has set rules for how banks should structure theirring-fenced operation, but they can get waivers on some aspectsto reflect the particular nature of their business model, Baileytold the summit, held at the Reuters office in London.
"You can't go showering waivers around in disrespect of thepolicy, but we will use waivers to achieve sensible ends thatare consistent with the policy to get the right outcomes," hesaid.
Lloyds, for example, wants to be exempt from havingseparate boards for the two arms because more than 90 percent ofits operations will sit in the ring-fenced business, sourceshave said.
"That would be a good example," Bailey said, although hedeclined to confirm if Lloyds will get its waiver.
Banks say meeting the 2019 deadline will be difficult asthey must set up separate IT and operational systems, and areawaiting the PRA to finalise the rules.
"The timetable is tight, there's no question about that,"Bailey said. He said the plan "is to deliver it to schedule" andideally banks will have the separate operations running from thestart of 2018.
The PRA's response to a consultation will be issued shortlyand it will launch a second consultation later this year.
Bailey said the regulator had also talked with HSBC aboutits domicile after the bank said it is reviewing whether to moveits headquarters from Britain to Asia.
"We will obviously be in close contact with them becausethere are important issues for us," Bailey said.
"It is entirely natural that as an institution yourshareholders should demand that you do this assessment. As aprivate organisation they should do it," he said.
Bailey also said banks must rewrite pay contracts to complywith new European Union guidelines banning top-up "allowances"that breach the bloc's cap on bonuses.
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(Editing by Elaine Hardcastle)
