Policy paper

Government response to the independent review on ring-fencing and proprietary trading

Published 9 December 2022

This was published under the 2022 to 2024 Sunak Conservative government

Ring-fencing reforms

Following recommendations by the Independent Commission on Banking in 2011, Parliament, via the Financial Services (Banking Reform) Act 2013, enacted a bank ring-fencing regime as part of the government’s response to the global financial crisis. Eligible banks were given six years to comply with the regime, which came into force in 2019.

The 2013 Act required the Treasury to undertake a review of the regime after two years in operation. In February 2021, the Chancellor therefore appointed an independent panel chaired by Keith Skeoch to undertake a review of the ring-fencing regime and propriety trading.

The independent review published its final report in March 2022. It found that the ring-fencing regime was worth retaining at present, but that the benefits may reduce in future especially as the resolution regime – designed to ensure the continuation of critical functions across both sides of the ring-fence in a banking group – is embedded. The panel therefore recommended that the Treasury should review how to align the ring-fencing and resolution regimes to ensure a simpler and more coherent regulatory regime in the future.

The report also made a series of recommendations to reduce the rigidity of the existing regime and address unintended consequences identified by the panel. These are designed to make the regime more adaptable, simpler, and better placed to serve customers, while continuing to protect financial stability and minimising risks to public funds.

This document sets out the government’s response to the independent review on ring-fencing and propriety trading and is informed by work undertaken by the joint HM Treasury and Bank of England task force, established following publication of the panel’s report.

Near-term reform measures

The panel recommended a series of near-term measures, which the government will take forward in secondary legislation to quickly improve the functionality of the existing regime. These recommendations will benefit customers, businesses, the financial services industry, and the economy, while maintaining appropriate financial stability safeguards. The government is therefore announcing its intention to consult on the following reforms in mid-2023 with a view to bringing forward secondary legislation later that year.

These reforms will:

• Take banking groups without major investment banking operations out of the regime, supporting domestic competition by removing requirements from retail-focused banks where ring-fencing does not provide financial stability benefits and removing a barrier to growth for smaller, growing banks.
• Update the definition of Relevant Financial Institution, removing a barrier preventing some small businesses such as high street financial advisers from accessing financial services and removing a disproportionate compliance burden on banks.
• Remove blanket geographical restrictions on ring-fenced banks operating subsidiaries or servicing clients outside the European Economic Area (EEA), helping UK banks to compete internationally and supporting UK businesses operating abroad while leaving space for regulators to manage any associated risks to their objectives;
• Take forward technical amendments outlined in the review to improve the functioning of the regime, removing unintended consequences, and providing benefits for the sector and the economy.

• Review and update the list of activities which ring-fenced banks are restricted from carrying out, to assess whether certain activities could in future be undertaken safely by ring-fenced banks in order to improve the supply of financial services to consumers and businesses. For example, this review will consider changes which could:

  • allow ring-fenced banks to hedge mortality risk to provide lifetime mortgages;
  • allow ring-fenced banks to provide inflation swaps to facilitate more project finance, including infrastructure;
  • allow ring-fenced banks and businesses greater flexibility to restructure loans through the debt for equity swap exemption; and
  • in specific cases, allow ring-fenced banks to take strategic equity stakes in certain types of technology companies where those enterprises are partnered with the bank to develop innovative solutions to improve and enhance bank customer experiences.

Review of the deposit threshold

The ring-fencing regime currently applies to banks with over £25 billion retail deposits. While the panel did not recommend raising the deposit threshold, it has remained unchanged since it was set in 2015, during which time sterling retail deposits have increased. The government intends to consult in mid-2023 on plans to increase the threshold from £25 billion to £35 billion, alongside consulting on the measures outlined above. The consultation process will consider any potential risks to financial stability and the provision of banking services, and will have regard to any competition effects.

Alignment of the ring-fencing and resolution regimes

The independent review found that the benefits of the ring-fencing regime would likely reduce over time as the resolution regime is embedded and offers a more comprehensive solution to addressing the problems of ‘too big to fail’.

The review recommended that the Treasury should therefore review the practicalities of aligning the ring-fencing and resolution regimes, with a view to introducing a new power for the authorities to remove banks from the ring-fencing regime that are judged to be resolvable.

The government agrees with the panel’s recommendation to review the practicalities of aligning the two regimes and intends to issue a public call for evidence in the first quarter of 2023 asking for views on the long-term benefits of the ring-fencing regime in light of developments in the resolution regime and relevant advances in the wider regulatory framework.

The call for evidence will explore a wide range of options for aligning the ring-fencing and resolution regimes, which will include, but will not be limited to the panel’s proposed approach. The call for evidence will inform decisions on the long-term future of the ring-fencing regime to be taken later in this Parliament.