The Financial Services (Banking Reform) Act 2013 required HM Treasury to appoint an independent panel to review the operation of the legislation relating to ring-fencing and banks’ proprietary trading activities. HM Treasury appointed Keith Skeoch as chair of the independent Review Panel (Panel) with responsibility to oversee and deliver two statutory reviews on the operation of ring-fencing legislation and proprietary trading.
On 20 April 2021, the Panel launched a call for evidence. The call for evidence paper set out a series of questions for areas in which the Panel was keen to build on the existing evidence base. On 19 January 2022, a statement was published providing an update on the findings of the Panel ahead of the final report and recommendations.
The statement notes that:
- Overall, since the regime became fully operational, there has been no evidence of banks attempting to ‘tunnel under’ the ring-fence. Rather, anecdotal evidence suggests that banks are careful in applying the legal provisions and rules to avoid breaches of the regime.
- The ring-fencing regime is not the only regime with the purpose of addressing the problem of too-big-to-fail, where the failure of a bank exposes the taxpayer to financial risk. The UK resolution regime is increasingly playing a more prominent role and providing a more comprehensive solution in progressing that objective.
- The ring-fencing regime has had no significant impact on competition in retail banking or its sub-markets.
- Commentary regarding ‘trapped’ liquidity caused by the ring-fencing regime is not supported by evidence.
- The ring-fencing regime has the potential to constrain the competitiveness of UK banks, but to date this impact has not been substantial.
- The current rules have resulted in unintended consequences that create unnecessary rigidity for customers, banks and regulators. In particular, absolute restrictions on ring-fenced bodies from servicing financial institutions, operating in some geographical areas, and providing a range of banking services have resulted in a regime that is overly rigid.
- Classic proprietary trading is no longer an activity being systemically undertaken by banks in the UK. This conclusion is in line with the Prudential Regulation Authority’s 2020 report.
The Panel remains on track to deliver its report on ring-fencing and proprietary trading to HM Treasury in early 2022.