On 11 November 2024, HM Treasury (HMT) published its response to the consultation on near-term reforms to the UK ring-fencing regime. It also published the draft Financial Services and Markets Act 2000 (Ring-fenced Bodies, Core Activities, Excluded Activities and Prohibitions) (Amendment) Order 2024 (draft Order) on legislation.gov.uk, along with a draft explanatory memorandum.

Background

The UK ring-fencing regime was introduced in 2013 by the Financial Services (Banking Reform) Act 2013, which inserted certain provisions into the Financial Services and Markets Act 2000. The regime, which was introduced as part of the structural reforms made to the UK banking sector following the 2008 Global Financial Crisis, broadly requires large banks to separate their core retail banking services from their investment banking activities, with the aim of improving the sector’s resilience to future crises while ensuring failures could be managed with minimal disruption to critical banking services and without the use of public funds.

Following an independent review of the ring-fencing legislation, which was chaired by Sir Keith Skeoch and reported in March 2022, one of the recommendations asked HM Treasury to review how to align the ring-fencing regime and resolution regime in the longer-term to ensure a simpler and more coherent regulatory regime, while the other six proposed changes to the regime that the review panel judged would improve the operation of the regime. Five of those ‘operational’ recommendations were directed at HM Treasury, with the other one directed at the Bank of England.

In response to these recommendations, HM Treasury and the Prudential Regulation Authority (PRA) consulted on proposals for near-term reforms to the ring-fencing regime in H2 2023.

Near-term reforms to the ring-fencing regime

The draft Order that has been published (and laid in Parliament) will implement the ‘smarter’ ring-fencing regime proposed by HMT in its 2023 consultation. It broadly addresses the five recommendations on improving the operation of the regime that were directed at HM Treasury, as well as implementing other proposals developed by HM Treasury to improve the regime following the Skeoch review.

The changes made by the draft Order are intended to resolve unintended consequences of the original legislation, provide increased flexibility to banks within scope of the regime, exempt certain banks from the regime, and ensure it remains proportionate.

Key amendments made to the regime by the draft Order include:

  • Increasing the threshold for including banks in the ring-fencing regime: The threshold of core deposits at which a bank becomes subject to the regime is being increased from £25bn to £35bn, and a new exemption is also being introduced for retail-focused banks that undertake minimal investment banking activity.
  • Reducing the regulatory reporting burden faced by ring-fenced banks (RFBs): Exposures to relevant financial institutions of below £100k will no longer be considered a regulatory breach, removing the requirement to report these to the Prudential Regulation Authority (PRA).
  • Relaxing restrictions on the geographical operations of RFBs: RFBs were previously restricted to operating in the UK and EEA but will now be able to operate globally, subject to any applicable rules made by the PRA.
  • Addressing regulatory barriers to RFBs engaging in mergers and acquisitions: A new 4-year transition period is being introduced to allow banks time to comply with the regime where they become subject to it following an acquisition by an RFB.
  • Relaxing restrictions on the products and services RFBs can offer: These restrictions are being relaxed in targeted ways, where doing so would improve outcomes for banks and their customers without giving rise to financial stability risks. For example, RFBs will now be able to make investments in UK SMEs and funds that invest in them (subject to certain restrictions) and enter into a greater range of trade finance arrangements.