New Rules Force RBS to Downsize

According to Reuters, The Royal Bank of Scotland Group plc (RBS) is moving ahead with its cost cutting strategies to adhere to the new rules that are soon to be implemented in UK. Earlier this week, the bank let go 618 employees in its financial planning unit. The action taken by RBS depicts the impact of 'The Retail Distribution Review’ legislation, which is expected to come into effect from December 31, 2012.

Reasons for the Downsizing

Under the new legislation, banks will be liable to sell retail financial products such as savings and investment schemes through highly qualified staff. Moreover, an upfront fee will be charged to customers.

Such rules increase expenses for both banks and customers. Moreover, banks would suffer lower demand for financial advice if customers are unwilling to pay such high prices for it.

The recent layoffs at RBS boosted the count to about 36,000 job cuts since the start of the financial crisis. Management aims to maintain its staff level by offering relocation opportunities wherever possible.

However, RBS, an 82% government-owned entity, is also employing 351 workers to assist customers with banking accounts and loans. This implies an effective job cut of 267 employees. The bank is trying to minimize job cuts and work efficiently for providing greater value to its customers and shareholders.

Similar Actions by Other Banks

RBS is not the only bank to take up such measures. Others, including HSBC Holdings Plc. (HBC - Analyst Report), followed the same route. HSBC Holdings announced the reduction of about 3,167 jobs in April, out of which nearly 950 employees were redeployed into other departments. The employees in HSBC’s retail bank, mainly senior and middle level managers, bear the brunt of the layoffs.

Since 2008, about 80,000 banking jobs have been slashed in the UK. Major banks that also trimmed down their headcount include Lloyds Banking Group Plc (LYG - Snapshot Report) and Barclays Plc (BCS - Snapshot Report).

Conclusion

In the current sluggish market, marred by new regulations, the banks have resorted to downsizing in order to reduce expenditures.

Overall, until revenue generation revives, a problematic cost-to-income ratio will continue to force many more banks to reduce their costs through job cuts as they need to maximize profits in order to boost capital ratios. Of course, everyone will now keep their eyes on the weaker firms that have not yet announced anything related to job cuts.

As a positive, the latest move by RBS to shrink its workforce will definitely go a long way in helping it implement its long-term strategy of improving profitability. However, this would add to the ever-increasing unemployment rate in the UK, which has been already facing a significant economic downturn.

RBS currently retains its Zacks #3 Rank, which translates into a short-term Hold rating.