Introduction

On 28 September 2023, HM Treasury published a consultation setting out near-term proposals for the UK ring-fencing regime. It also set out the responses to its earlier call for evidence on the longer-term future of the ring-fencing regime. The PRA also published a consultation in respect of third-country branches and subsidiaries within ring-fenced body sub-consolidation groups.

HM Treasury consultation – Smarter ring-fencing regime

HM Treasury has published a consultation paper on near-term reforms for a smarter ring-fencing regime. It has also published draft secondary legislation, The Financial Services and Markets Act 2000 (Ring-fenced Bodies, Core Activities, Excluded Activities and Prohibitions) (Amendment) Order 2023.

The independent review of ring-fencing, undertaken by a panel of experts led by Sir Keith Skeoch, made a series of near-term recommendations to improve the operation of the ring-fencing regime. As part of the Edinburgh Reforms the government announced its intention to consult on a series of near-term reforms to the ring-fencing regime, broadly taking forward the panel’s recommendations.

A summary of the government’s proposals can be found in chapter 2 of the consultation paper and includes changes to the deposit threshold, permitted products and services, definitions, and architectural reforms. Among the changes to the deposit threshold is a proposed increase in the ring-fence deposit threshold from £25 billion to £35 billion of ‘core deposits’. Architectural reforms include (i) allowing ring-fenced banks to establish operations outside of the UK or EEA; and (ii) introducing a four-year transition period for complying with the ring-fencing regime for ring-fenced banking groups that acquire a bank not subject to the ring-fencing regime.

The deadline for feedback to the consultation paper is 26 November 2023.

The government intends to lay secondary legislation implementing the near-term reforms in Parliament in early 2024, subject to Parliamentary time. The government expects the legislative changes to come into effect as soon as they have been approved by Parliament.

PRA consultation – Ring-fenced bodies: managing risks from third-country subsidiaries and branches

The PRA has published Consultation Paper 20/23: Ring-fenced bodies: managing risks from third-country subsidiaries and branches (CP20/23).

In CP20/23, the PRA sets out its proposed rule and policy updates in respect of the establishment and maintenance of third-country branches and subsidiaries within ring-fenced body sub-consolidation groups. The PRA has issued the consultation given the above HM Treasury consultation which, among other things, proposes to allow ring-fenced bodies to establish entities in third countries. The PRA considers that there is potential for third-country branches and subsidiaries of ring-fenced bodies and ring-fenced affiliates to create risks to the provision of core services in the UK provided by ring-fenced banks.

The policy proposals included in CP20/23, when implemented would:

• Introduce a rule whereby ring-fenced bodies must ensure that any third-country branch or third-country subsidiary within the ring-fenced body sub-consolidation group does not present a material risk to the provision of core services in the UK by the ring-fenced body.
• Set out a non-exhaustive set of supervisory expectations that the PRA will consider when determining if a third-country branch or third-country subsidiary of a ring-fenced body or ring-fenced affiliate poses a material risk to the provision of core services in the UK by the ring-fenced body.

The proposals would result in changes to the Ring-fenced Bodies Part of the PRA Rulebook (Appendix 1) and Supervisory Statement 8/16 – RFBs (Appendix 2).

The deadline for feedback to CP20/23 is 27 November 2023.

The PRA proposes that the implementation date for the changes resulting from CP20/23 would coincide, as closely as practicable, with the removal of the legislative prohibition on non-EEA branches and subsidiaries. This is expected to be in the first half of 2024.

HM Treasury response to the Call for Evidence on aligning the ring-fencing and resolution regimes

HM Treasury has published the response to its earlier Call for Evidence (CfE) on aligning the ring-fencing and resolution regimes.

In response to the independent panel’s recommendation on the longer-term future of the ring-fencing regime, the government issued, in March 2023, a CfE on aligning the ring-fencing and resolution regimes.

The CfE sought views from respondents to inform two judgements:

1. An assessment of the ongoing benefits that ring-fencing may provide to financial stability which are not found elsewhere in the regulatory framework.
2. What steps can be taken to better align the regimes without losing financial stability benefits or over-burdening firms with new, alternative, regulatory requirements.

The CfE also invited respondents to consider a spectrum of options for the longer-term future of ring-fencing.

The CfE closed on 7 May 2023, with the government receiving 14 written responses. The responses highlighted the following:

• Some respondents noted that ring-fencing supported the planning of resolution, the management of a firm’s failure, notably by facilitating post-resolution restructuring and the effective risk management and supervision of firms.
• Others felt that such benefits would only apply to large, complex international firms, if they applied at all.
• Some respondents suggested that ring-fencing could make resolution and supervision processes more complex and less effective.
• Certain respondents suggested that other regulatory developments such as enhancements to the banking capital frameworks and to deposit insurance provided greater financial stability safeguards than ring-fencing.
• Many respondents voiced concerns about the operational costs of ring-fencing and noted the wider potential negative implications on banks’ competitiveness, UK productivity and the real economy.
• Respondents broadly agreed with the proposed criteria to assess potential long-term options for aligning the ring-fencing and resolution regimes: impact on financial stability, firms, UK competitiveness, growth, and competition in the banking sector.
• Some respondents argued that the proposed criteria implied resolution and ring-fencing were substitutes, whereas they viewed the two regimes as complementary.

The government will set out publicly its policy response to the CfE and any proposals for further reform in the first half of 2024.