On 16 March 2022, HM Treasury laid in Parliament the Final Report of the Ring-fencing and Proprietary Trading Independent Review. The Final Report sets out the final conclusions and recommendations of the Review Panel.
Overall, the Review Panel found that the ring-fencing regime (the regime) has been successful in achieving some of its objectives of improving financial stability, but there is more to do to reduce the risk to public funds and address too-big-to-fail. The Review Panel recognises that the regime’s benefit will likely diminish with time, especially as the resolution regime – designed to ensure the continuation of all critical functions across both sides of the ring-fence in a banking group – is embedded.
The Review Panel’s main recommendation is to change the scope of the regime in the longer term by giving the authorities more flexibility and a new power in their toolkit to remove banks from the regime that are judged to be resolvable. A summary of the Review Panel’s recommendations can be found on page 16 of the Final Report and includes:
- Changes to the scope of the regime to focus on large, complex banks
- Banks with deposits below £25 billion should continue to be exempt from the regime;
- Banks with deposits above £25 billion that do not undertake excluded activities above a certain level should be exempt from the regime; and
- Only excluded activities above that level should be required to be placed in a non-ring-fenced body (NRFB).
- Adjustments to the restrictions on servicing relevant financial institutions (RFIs)
- An exemption should be introduced to allow RFBs to provide banking services to smaller RFIs;
- The definition of RFIs should be moved from legislation to the PRA Rulebook; and
- A grace period should be introduced for NRFBs to move customers that are no longer classified as an RFI to an ring-fenced body.
- Improvements to the operation of the regime through technical amendments
- Transitional periods for complying with ring-fencing rules should be introduced for mergers and acquisitions of banks;
- NRFBs should be enabled to service central banks outside of the UK;
- The status of trustees and insolvency practitioners should be clarified; and
- The notice of declaration onboarding requirement for NRFB customers should be removed.
Alongside the review on ring-fencing, the Review Panel assessed banks’ proprietary trading activities and agrees with the conclusions of the PRA in its Proprietary Trading Review published in 2020. The Final Report examined the evidence to support the view that classic proprietary trading is no longer being undertaken by banks in the UK, however it recognises the exposure to indirect risks emanating from the non-bank sector and recommends that the authorities continue to monitor proprietary trading activities and associated risks in both the bank and non-bank sectors.